Skip to main content

Full text of "Thomas Ferguson - Golden Rule: The Investment Theory Of Party Competition And The Logic Of Money Driven Political Systems"

See other formats


The Investment Theory of Party Competition and the 
Logic of Money-Driven Political Systems 

THOMAS FERGUSON is professor of political science at the 
University of Massachusetts, Boston. 

The University of Chicago Press, Chicago 60637 
The University of Chicago Press, Ltd., London 
© 1995 by The University of Chicago 
All rights reserved. Published 1995 
Printed in the United States of America 

04 03 02 01 00 99 98 97 96 95 5 4 3 2 1 

ISBN 978-0-226-16201-0 (e-book) 

ISBN (cloth): 0-226-24316-8 
ISBN (paper): 0-226-24317-6 

Library of Congress Cataloging-in-Publication Data 
Ferguson, Thomas, 1949- 

Golden rule : the investment theory of party competition and the logic of money- 
driven political systems / Thomas Ferguson. 

p. cm.—(American politics and political economy) 

Includes bibliographical references and index. 

ISBN 0-226-24316-8 

1. Business and politics—United States. 2. Campaign funds—United States. 3. 
Political parties—United States. 4. United States—Economic policy. I. Title. II. 

JK467.F47 1995 




. ' The paper used in this publication meets the minimum requirements of the American 
National Standard for Information Sciences—Permanence of Paper for Printed Library 
Materials, ANSI Z39.48-1984. 

Golden Rule 

The Investment Theory of Tarty Competition and the 
Logic of Money-Driven Political Systems 

Thomas Ferguson 

Chicago and London 

Edited by Benjamin I. Page 




Introduction. Politics. Social Science, and the Golden Rule: 

Reading the Handwriting on the Wall 

1. Party Realignment and American Industrial Structure: The 

Investment Theory of Political Parties in Historical Perspective 




2. From ‘Normalcy’ to New Deal: Industrial Structure. Party 

Competition . and American Public Policy in the Great Depression 

3. Monetary Policy. Loan Liquidation, and Industrial Conflict: 

The Federal Reserve and the Open Market Operations of 1932 (with 

Gerald Epstein) 

4. Industrial Structure and Party Competition in the New Deal: A 

Quantitative Assessment 

5. By Invitation Only: Party Competition and Industrial Structure 

in the 1988 Election 

6. ‘Real Change’? ‘Organized CapitalismA Fiscal Policy, and the 

1992 Election 

Conclusion. Money and Destiny in Advanced Capitalism: Paying 

the Piper. Calling the Tune 



Deduced and Abandoned: Rational Expectations . the Investment 

Theory of Political Parties, and the Myth of the Median Voter 




The Investment Theory of Party Competition 


Politics, Social Science, and the Golden Rule: 
Reading the Handwriting on the Wall 

In the same hour came forth fingers of a man’s hand, and wrote over against the 
candlestick upon the plaister of the wall of the king’s palace. . . . MENE, MENE, 
TEKEL, UPHARSIN. This is the interpretation of the thing: MENE; God hath 
numbered thy kingdom, and finished it. TEKEL; thou art weighed in the balances, and 
art found wanting. PHERES; thy kingdom is divided and given to the Medes and the 

Book of Daniel 

A REVERENT and quite nonsectarian nod to the charitable 
deduction is about as close to religious themes as the Public 
Broadcasting System’s Nightly Business Report ever comes. One 
memorable evening in late October 1992, however, the talking heads 
who normally find inspiration on Wall Street decided suddenly to 
borrow their evening story line from the famous tale of Belshazzar’s 
feast in the Book of Daniel. 

Just as in the Old Testament original, a ceremonial royal banquet 
provided the setting—in this instance, the regular fall meeting of the 
Business Council at Hot Springs, Virginia, where a special camera 
crew had been dispatched. And, again, as in the older episode, the 
sumptuous repast was significant less in its own right than as the 
artistic backdrop for reflections on a mighty empire’s succession crisis 
—in this case, the 1992 presidential campaign, about which a select 
group of Business Council leaders had agreed to be interviewed on 

First on the air that night was Ford Motor Chair Harold Poling. In 
contrast to many others in his industry, the auto executive still 
enjoyed not only honor but profits. Nevertheless, his view of the 
campaign of incumbent President George Bush was not sanguine. To 
many, indeed, it sounded like a last judgment on the man whom he 
had accompanied only a few months before on an ill-fated trip to 
Tokyo. Poling was, according to the introductory voice-over, 
“pointedly” maintaining neutrality, pending further clarification of 
the candidates’ views on trade and other issues. After him came 
Bethlehem Steel Chair Walter Williams, who offered the evening’s 
first real revelation: that deep “disillusionment” with one of the most 

ardently free enterprise-oriented regimes in American history was 
“pushing [many businesses] to [Democratic nominee Bill] Clinton.” 

John Young, chair of Hewlett-Packard and a longtime Republican, 
followed. Some days before, Young and Apple Computer Chief 
Executive Officer John Sculley had led a phalanx of Silicon Valley 
executives in a mass public endorsement of the Arkansas governor. 
Now, once again on camera, Young sonorously reaffirmed his new 
convictions. Next in the parade was another onetime Republican 
stalwart, Southern California Edison Chair Howard Allen. The utility 
executive came startlingly to the point: 

It’s contrary to my basic instincts as a Republican and the way my father reared me, 
but there are certain things that government should have oversight on and not just sit 
back and say that competition will solve everything ... it hurts me to say that and my 
father would turn over in his grave if he heard me say it. 

It fell to Martin-Marietta CEO Norman Augustine to sum up the 
evening’s discussion. “I think,” the defense industry executive 
observed, “the Democrats are moving more towards business, and 
business is moving more toward the Democrats. 

In the account in the Book of Daniel, King Belshazzar did not 
initially get the message. But at least he recognized there was one: as 
soon as he saw the moving hand, he “cried out loud to bring in the 
astrologers, the Chaldeans, and the soothsayers.” When they proved 
unable to decipher the inscription, he had the good sense to heed his 
queen. He summoned the prophet Daniel. 

No such lucidity attended 1992’s high-tech reenactment of the 
incident. This time, when the handwriting flashed on the electronic 
walls of some 2 million homes, no one batted an eye (apart from 
viewers of the program, who dialed up a specially advertised 900 
number, seeking more information in disproportionately heavy 

Instead, a few months later, President Clinton—with Apple’s 
Sculley and Federal Reserve Chair Alan Greenspan ensconced in the 
audience next to Hillary Rodham Clinton—unveiled his long-awaited 
economic program in a special address to a joint session of Congress. 
Although his proposed five-year deficit reduction plan strikingly 
resembled a scheme put forward by Ross Perot that candidate 
Clinton had attacked all during the campaign, and was shortly to win 
a public endorsement from many of America’s largest businesses, the 
president’s call to raise taxes on the very wealthiest Americans struck 

a strangely sensitive nerve. Somehow, in a miracle of doublethink, 
many of the astrologers, Chaldeans, and soothsayers who provide 
most of what passes for political analysis in America descried 
ominous signs that the new administration was flirting with the 
specter of class war.- 

If war had in fact been declared, it was certainly of a novel kind. 
Only one side seemed to be mobilizing. As Japan, with an 
unemployment rate far below that of the United States, prepared to 
embark on a much larger fiscal stimulus program, the president 
scaled back his own promised stimulus initiative to a paltry $16 
billion—an amount less than the measurement errors in many parts 
of his new budget. Then, as some of his own Treasury appointees 
questioned the need for any action, the president dropped the 
measure altogether after a single rebuff by the Senate. With members 
of his economic team putting out word that a key indicator of their 
success would be the state of the bond market, the president also 
postponed action on two additional campaign promises: to raise the 
minimum wage, which had stayed fixed for more than a decade, and 
to require American employers to invest in training workers. He also 
withdrew (or declined to send forward) the nominations of several 
prominent liberal activists whose views piqued conservative critics, 
and handed the hot potato of labor law reform to a special 
commission not due to report for a year. In the midst of these 
switches, the president also struggled to find a compromise that he 
and the top military brass, if not necessarily gay Americans serving 
their country in the armed forces, could live comfortably with. 

By abandoning plans for a fiscal stimulus as economic growth 
slowed in the rest of the world and cutbacks in military spending and 
massive exports of American jobs overseas continued, the president 
was in effect throwing the entire burden of reviving the economy on 
the bond market and the Federal Reserve. The hope was that a 
credible deficit reduction program would induce the Fed to lower 
short-term interest rates, and reduce investors’ fears of inflation. 
With the Fed cooperating, investors would then buy quantities of 
long-term bonds and push down long-term interest rates. Despite its 
short-run plausibility, however, this strategy carried with it a self- 
defeating catch-22 that guaranteed that ordinary Americans would 
feel increasingly beleaguered for a long time to come, regardless of 
what happened to the deficit: given their virtual paranoia about 
inflation, both the Fed and financial markets were certain to demand 

a return to higher rates at the first signs of a recovery. 

But that was a problem for the future. In the meantime, the 
Cheshire-cat economic upturn—now you see it, now you don’t—was 
fanning widespread anxieties about a “jobless recovery,” and the new 
round of stridently partisan wrangling on the budget could not fail to 
stir up additional unease. As consumer confidence plunged, and the 
White House stumbled from one snafu or scandal to another, the 
president’s popularity went into free fall. 

Once again, a mighty empire was in crisis. Amid savage media 
attacks, a siege mentality enveloped the White House. With the 
president ordering air strikes against a successor of the Medes and 
the Persians, more calls went out to the astrologers, Chaldeans, and 
soothsayers. Their replies were all but unanimous. As though an 
invisible hand were directing them, the sages brushed off public 
concerns about the slow pace of economic recovery. Instead, they 
chorused, the president was in trouble because he had strayed too far 
to the left of center. To have any hopes of salvaging his presidency, 
the chorus continued, the president must repudiate the liberals who 
had hijacked his programs and recruit experienced, senior “centrist” 
advisers who could help him get back on track in the middle of the 

Bombarded with this advice for many days by newspapers, 
magazines, television, and many private sources, the White House 
eventually got the message. On May 29 came a stunning 
announcement: David Gergen, an intimate of many of the top 
business figures most opposed to Clinton in 1992 and a premier 
architect of the Reagan agenda that Clinton was pledged to reverse, 
was rejoining the White House as a special counselor to the 

With this much-heralded “return to the middle of the road,” the 
logjam that had held up the president’s budget in Congress now 
began to break up. After further trimming to please conservative 
critics, the new “government of national unity” (as it would be styled 
in Italy or Latin America) secured passage of a markedly deflationary 
budget that even many proponents admitted would weigh heavily on 
the economy for a long time to come. Then it set about scaling down 
plans for sweeping reform of the health-care system while cranking 
up a campaign in favor of a particularly rigid and uncompromising 
version of the controversial North American Free Trade Agreement 
(NAFTA).- Though many details remained to be ironed out, three 

points were already evident: First, because from the start the 
president had ruled out “single-payer” (“Canadian-Style”) health 
care, whatever health plan finally evolved would be comparatively 
expensive, and likely in the end either to force curtailment of services 
or hefty rises in taxes of one sort or another. Second, the best hope 
the administration could hold out to average Americans anxious 
about the export of their jobs overseas was its highly publicized 
campaign to force another country (Japan) to live better. Third, the 
pillars of Hercules that marked the outermost limits of respectable 
political discourse in the United States had just relocated—once 
again, to the right. The debacle of Clinton’s first months in office, all 
respectable opinion now agreed, proved the bankruptcy of the liberal 
or “left” alternative.- 

Now my point in retracing this latest uncanny turn in America’s 
public life is not that the right-wing media reduced to ashes the good 
intentions of some backwoods naifs within months after they entered 
office. Quite the contrary, a major ingredient in the disaster clearly 
derived from the new administration’s elephantine attempts to cover 
its own retreat from its economic promises by highlighting social 
issues—first by showcasing Robert Reich and Vernon Jordan as 
heads of a transition team that recruited the cream of Wall Street and 
Lloyd Bentsen, the Senate’s literal six-million-dollar-man, to run the 
economy; then by rushing headlong into the gays in the military 
debacle at the very moment it was completing plans to take over 
(much of) Perot’s deficit program while turning its back on efforts to 
stimulate the economy, retrain workers, and raise the minimum 
wage; and finally by striving so ostentatiously to field the perfect 
politically correct cabinet that a good idea became a painful and 
embarrassing joke. As discussed in this volume’s essay on the 1992 
election ( chapter 6 ). such playing to stereotypes has a clear, 
identifiable function (and by now, a long history) in a Democratic 
party that is supposed to represent ordinary working Americans but 
is actually run by investment bankers and their allies. But it is also 
very dangerous—especially when a country faces literally years of 
slow growth and high unemployment under an administration whose 
political base strikingly resembles the Seattle Space Needle. 

Nor, certainly, would it be wise to suggest that, with or without 
Gergen around to play high-tech sandman, the president cannot 
recover, at least to the extent of possibly squeaking through to 
reelection in 1996. If for reasons spelled out later in this book, the 

Clinton presidency is always likely to be a strange combination of 
Kennedy style and Carter substance, it would be rash to jump to the 
conclusion that our latest Southern president is shortly fated to be 
gone with the wind. As a graduate student, I sat in on one of the first 
courses ever offered by an American university on “political business 
cycles.” That course was team-taught, but one of its leaders was a 
distinguished economist whom President Clinton appointed to the 
Council of Economic Advisors. I will, accordingly, be surprised if in 
1996, if no other year, the Clinton administration cannot contrive a 
“national development bank,” the promise of yet another “middle- 
class tax cut” or, at least, a few well-timed cuts in interest rates to 
quicken both the economy and the pulse of liberals for a few strategic 
months. With help from the rest of the world (by no means 
guaranteed) and vast sums of campaign money, such moves might 
provide the racer’s edge, particularly in a three-horse race marked, as 
it surely will be, by massive public cynicism and low voter turnout. 

Instead, my point is less complicated—that it is high time both 
social scientists and voters learned to read the handwriting on the 
wall. That Clinton strongly resembles a registered Republican and 
might well go down in history as the most conservative Democratic 
president since Grover Cleveland was entirely predictable. Anyone 
should have seen it who had followed what might be termed the 
“Golden Rule” of political analysis—to discover who rules, follow 
the gold (i.e., trace the origins and financing of the campaign, along 
the lines laid down in the first essay in this book). Indeed, some 
people did see it—though many of those who bothered to look were 
active participants in financial markets and thus had no incentive to 

By contrast, the armies of people who live by words, who report, 
observe, and comment in public on American politics had virtually 
nothing of substance to say before, during, or after the 1992 election. 
Instead, in the manner of a children’s storybook or a morality play, 
the press and politicians talked incessantly about character, as if the 
key question facing America were whether it would be better to have 
a steady navigator, a street bully, a hockey goalie, a cancer survivor, 
a war hero, or a hillbilly from Oxford as president. When they didn’t 
descant upon character or “toughness,” they flapped about the horse 
race, about “spin,” or consultants, or “who was electable.” When 
they spoke of issues, it was usually to debate details of a tax cut that 
was too small to do anyone any good and that was, in any case, 

unlikely ever to happen. 

But it is a simple fact that virtually all the issues that both elites 
and ordinary Americans think about outside of or alongside 
campaigns—work and employment, free trade or protection, health 
care, the future of U.S. production, the cities, taxes—are critically 
important not only to voters, but to well-organized investor blocs, 
businesses, and industries. And it is another simple fact that many 
such groups invest massively in candidates. 

During the campaign, however, we heard at best about fundraising 
totals. Or a few names, as though that told anyone anything. In a 
frontpage story in early March 1992, for example, USA Today 
informed readers that actress Dixie Carter was backing Clinton, that 
Ed Asner had contributed to Tom Harkin and rock singer Don 
Henley had donated to Paul Tsongas. Quoting a study whose authors 
should have known better, the paper also indicated that 
“philanthropists” were the group most heavily represented among 
donors to Pat Buchanan’s uniquely acerbic campaign.- 

In December 1991, when Jerry Brown first attempted to make an 
issue out of the corrupting effects of campaign finance, he was 
ridiculed by the Democratic Party’s leaders, the other candidates, and 
the press. The networks, which have surely done more to lower 
public standards of taste in the past half-century than any group this 
side of Las Vegas, and party leaders, who virtually without exception 
double as handsomely remunerated lobbyists, claimed that any 
mention of Brown’s 800 number for small donors during television 
debates would demean the campaign. (This noble commitment to 
good taste, however, proved short-lived. Soon one issue about the 
leading Democratic aspirant dominated the airwaves and the 
newspapers: Did he or didn’t he? The reference was not to a 

The record of the academy over the last twenty years—or indeed, 
over the last half-century—is scarcely better. For most scholars 
Rockefeller is a foundation; Lamont, Seth Low, and Widener are 
libraries, and Brookings is an institute, to which they aspire to be 
duly grateful. Serious discussion of money, industrial structure, and 
politics scarcely exists, save among a thin stratum of gifted students 
of comparative politics. Most detailed studies of politics and money 
are highly stylized. Among these are the many studies of political 
action committees (PACs), where serious mismeasurement of the 
independent variable is virtually guaranteed, since PACs comprise a 

comparatively small part of politically significant money in most 
national elections; the older tradition of “phone books” listing large 
donors, which recall the Comte de Buffon’s lucubrations on the 
animal world, and which, after almost half a century, have yielded 
little more than the generalization that generalizations are hazardous 
and the cautionary bromide (which is certainly true) that money 
doesn’t buy everything; and a thin literature on congressional 
elections, which is sometimes seriously meant and occasionally 
productive of some insights, but remains blind to the ways (discussed 
in chapter 1 in this volume and elaborated in the appendix ) that 
money-driven political systems shift the whole political spectrum 
around and comprehensively influence candidates’ electoral appeals.- 

Early in my life I worked briefly in Washington and on Wall Street. 
Ever since, I have intermittently returned to each. I have also 
observed firsthand how several major foreign political systems 
function. I wrote the original version of the first essay in this book 
( chapter 1 ) because I was convinced that modern students of politics 
resemble adherents of Ptolemy in a Copernican world—and that the 
now fashionable “rational choice” approaches to analyzing electoral 
systems produced not rigor but mortis.- It was high time, I thought, 
to spell out precisely what was wrong with the celebrated “median 
voter” approach to electoral democracy and to put forward a clear 
alternative, in which —as long as basic property rights do not emerge 
as the dominating issue —competition between blocs of major 
investors drives the system. 

This first essay attracted a considerable amount of attention— 
rather more, indeed, than a simple citation count would suggest. 
Among the most interesting responses were several from analysts 
working in the highly controversial gray area where neoclassical 
microeconomics now meets political analysis. Though in principle the 
issues they raised were uncomplicated and of broad concern, their 
arguments tend to be formulated in rather technical terms. 

To avoid putting off readers unfamiliar with microeconomics and 
the applications of what are somewhat grandiloquently labeled 
“rational choice” methods to political science and history, my review 
of the ensuing discussion appears in the appendix to this book 
instead of directly after chapter 1 . Anyone who chooses can thus 
move directly from the original essay to the more accessible case 
studies of various elections which follow in chapters 2 through 6 . 

But I hope very much that any reader who takes this shorter path 

will eventually be inspired to try the appendix . A royal road to 
comprehending the complex relations between money and politics 
will probably never be found. But this appendix presents what I hope 
is the next-best alternative: a serious inventory and reply to the major 
objections leveled by the critics of the investment approach. 

Because the discussion is really concerned not with technique but 
with perennial issues in social theory, I have made every effort to 
make it accessible. It sharpens the considerations advanced in the 
earlier essay by working through the case of the “median voter” in 
some detail. By systematically considering how problems of political 
money affect the logic of the conventional model, it becomes 
embarrassingly obvious how flimsy that much-touted construct really 
is. The conventional model breaks down even in very straightforward 
cases which should display it to best advantage. Simply extending the 
discussion a bit more also points up fallacies in the cases advanced by 
other critics of the original essay—both the critique in terms of 
“rational expectations” put forward by Richard McKelvey and Peter 
Ordeshook as well as the objections from the “retrospective voting” 
school, according to which even a completely uninformed electorate 
is able to control policy by just voting the rascals out. 

This appendix will also, I trust, dispose forever of suggestions that 
the study of political ideas or “rhetoric” is somehow antithetical to 
serious efforts to come to terms with the realities of money-driven 
politics. On the contrary, as I emphasize there, investment in ideas is 
an absolutely fundamental part of the American political system, 
going well beyond the jejune notions of “agenda setting” that have 
dominated academic writing (which sees agendas set by, for example, 
clusters of American states). And, as Lance Bennett has recently 
emphasized, the investment approach to party competition is basic to 
understanding why American campaign appeals are the asthenic 
compounds they are. In the next few years, I expect, we will learn to 
measure some of these phenomena a bit more precisely .- 

The other essays in the book put this investment approach to 
practical use, analyzing real political coalitions in the spirit of the 
first essay. Chapters 2-4 “From ‘Normalcy’ to New Deal,” 
“Monetary Policy, Loan Liquidation, and Industrial Conflict” [a 
coauthored study of the Federal Reserve System in the Depression], 
and “Industrial Structure and Party Competition in the New Deal”) 
add up to a detailed empirical and theoretical critique of our 
understanding of one of twentieth-century America’s great formative 

political experiences—the New Deal. Drawing on a large amount of 
archival evidence—including many letters and documents whose 
import is still imperfectly assimilated—these essays show how a bloc 
of capital-intensive, multinationally oriented businesses came to 
power during the Great Depression by reinventing the Democratic 

The third of these essays ( chapter 4 . “Industrial Structure and 
Party Competition in the New Deal: A Quantitative Assessment”) 
brings together the results of more than a decade of work in archives 
to present a detailed quantitative study of the financing of the 1936 
presidential campaign. It also contains an extensive discussion of the 
statistical methods I believe are best suited for analyzing presidential 
elections, and a long discussion of potential pitfalls. 

The remaining two essays in the book, chapters 5 and 6, bring the 
story down to our own time, by examining the disintegration of the 
New Deal system since the late seventies. The first of these, on the 
1988 election, amounts to a review essay on the main political 
developments from the pivotal 1973-74 recession to Bush’s 
succession to the presidency. (Though it does not presuppose 
familiarity with my coauthored Right Turn, it does in effect function 
as a kind of sequel, since the former broke off with the 1984 
election.)— In contrast to most other academic treatments of this 
period, the discussion of the party system and the business 
community is framed throughout in a global context, with 
considerable attention paid to foreign economic policy developments 
within the G7. The essay analyzes how these eventually led to the 
erosion of the Reagan coalition and the revival of business opposition 
to the GOP inside the Democratic Party. 

The last essay in the book discusses the collapse of the Bush 
presidency and the rise of what became the “Clinton coalition.” It 
also presents a lengthy analysis, drawn from many primary sources, 
of Ross Perot, whose meteoric career on the national political stage 
repays close study as the ne plus ultra of what the investment 
approach is pointing to about our political system. 

The lamentable state of the social science literature on money and 
politics tempts anyone who trys to engage the question afresh to 
plead that if he or she has failed to see farther, it is because one is 
standing on the shoulders of pygmies (indeed, all too frequently, 
subsidized pygmies). But the real situation is not as bad as this 
sounds. It is certainly true that the normally sunny dispositions of 

many well-known political scientists, and perhaps slightly fewer 
economists and historians, seem to cloud over when questions of 
politics, industrial structure, and pecuniary resources come up. It is 
also regrettably the case that serious work in this field is unlikely to 
be supported by any foundation or grants agency whatsoever. But 
withal, scholarship remains a social endeavor. I have certainly 
benefited from a great deal of help, which I have tried to 
acknowledge at the beginning of each of the essays in this book. 

A few people, however, deserve special mention. At the head of the 
list is Ben Page, the editor of the University of Chicago Press 
American Politics and Political Economy series. He first persuaded 
me that this study was worth undertaking and could actually be 
published. Even more importantly, however, at several points near 
the end he played an absolutely decisive role in encouraging me to 
complete it. Without him, there would be, literally, no book. I owe 
almost as much to John Tryneski of the University of Chicago Press 
—not least for the patience and good humor he displayed while 
waiting for Godot (who, I believe, did not have two young children, 
and thus perhaps had less of an excuse). 

Over the last few years I have profited greatly from virtually 
constant interchange with a number of gifted analysts of comparative 
politics and economics, including Bruce Cumings, Robert Johnson, 
James Kurth, Stephen Magee, and Alain Parguez. It is also a pleasure 
to acknowledge my considerable debts to Walter Dean Burnham, 
Gail Russell Chaddock, Erik Devereux, James Galbraith, David Hale, 
Stanley Kelley, David Noble, Edward Reed, Sherle Schwendiger, Jeri 
Scofield, and Meredith Woo-Cumings. I was very fortunate to have 
two very able scholars as coauthors, Gerald Epstein and Joel Rogers. 
(One of the essays with Epstein is included in this book, in chapter 3 . 
This was very much a joint work and the order of our names was 
settled by the alphabet when the essay originally appeared in the 
Journal of Economic History. It seemed only right to adhere to the 
same convention for the version in this book.) Ed Beard and Acting 
Provost Fuad Safwat of the University of Massachusetts, Boston, also 
helped my research in significant measure. Goresh Hosangady 
provided invaluable statistical assistance time and again, while 
Michael Kagay responded to numerous requests for assistance with 
polling data. Suggestions and comments that were often very helpful 
and stimulating came from two anonymous referees for the 
University of Chicago Press (one of whom, Theodore J. Lowi, 

promptly declassified his identity) and a member of the press’s 
editorial board. 

My wife, Anne McCauley, contributed many suggestions about 
both the form and the content of this study, while my daughters 
Louisa and Chloe made sure I was never tempted to rest. To the three 
of them this book is dedicated. 


Party Realignment and American Industrial 
Structure: The Investment Theory of Political Parties 
in Historical Perspective 


IN MID-SEPTEMBER 1912 a gentleman representing Woodrow 
Wilson, the Democratic nominee for president of the United States, 
came calling on Mr. Frank A. Vanderlip. At that time Vanderlip was 
one of the most prominent businessmen in America. Quoted 
frequently in the press and recognized as a leading Progressive, he 
served on the boards of 12 major corporations, including E. H. 
Elarriman’s Union Pacific Railroad, the mammoth U.S. Realty and 
Improvement Co., and four sizable banks. He was also a trustee of 
New York University and the Stevens Institute, a member of the 
executive committee of the New York Chamber of Commerce, and 
active in the National Civic Federation. Most important, however, he 
was president of the National City Bank of New York, after J. P. 
Morgan & Co. probably the most important bank in America. 

Nothing in the record suggests that the banker felt any 
embarrassment at receiving the envoy of a party associated in 
American folklore (and much subsequent academic writing) with 
straitened Southern and Western farmers. It is easy to understand 
why: the visitor was Henry Morgenthau Sr., himself a director a 
dozen corporations (including the big, multinationally oriented 
Underwood Typewriter Co.) and a major figure in Manhattan real 

As was his custom with anything important, Vanderlip later wrote 
a detailed account of the encounter to James Stillman. Along with 
William Rockefeller (younger brother of the even more famous and 
wealthier John D.), Stillman had been prominently associated with 
the bank for many years. He was probably its largest stockholder. 
Now retired in France, he superintended the bank by remote control. 
Almost every other day brought a long letter from Vanderlip, 
describing his activities and decisions. After reading the letters, 
Stillman would write back his comments and instructions, 

dispatching them once in a while by secret courier or sometimes 
sending them in code. Because the months prior to the 1912 election 
had been filled with acrimonious controversies that importantly 
affected National City, especially the discussions of what eventually 
became the Federal Reserve Act, Vanderlip could be sure of 
Stillman’s attention as he related how 

I had a two-hour session with [Charles D.] Hilles, the chairman of the Republican 
Campaign Committee, and one of equal length with Morgenthau, who is Chairman of 
Wilson’s finance committee, and who is, with [William G.] McAdoo, practically 
directing the campaign. Hilles is not hopeful. I think the most [William Howard] Taft 
really hopes for is to get a larger vote than [Theodore] Roosevelt, although he believes 
that sentiment is swinging back to him some, and there is some evidence of that. ... I 
had a very thorough going over of the administration with Hilles and I must say the 
result did not improve my views any of its efficiency. There never has been any clear 
understanding in the White House in regard to the National City Company [National 
City’s newly organized and controversial securities affiliate], and the whole disposition 
was to avoid trouble and to pass the question along. My conversation with 
Morgenthau left me more pessimistic about the political outlook than I have been at 
all. I am afraid not a great deal that is good is likely to come out of a Wilson 
administration. At least, I am afraid that a good deal that is foolish and ill considered 
may come out of it. I think Wilson is really pretty well imbued with the “Money 
Trust” idea, and I fear he lacks the sincerity that I believed at one time he had. 
Morgenthau told me positively that it would not be his plan to have any extra session 
of Congress and that he proposed to take up banking legislation before the tariff; that 
he favors a central bank and one of the arguments he proposed to use is that the 
people are now under all the evil conditions of an unrestrained central bank, through 
the operations of the “Money Trust”; that there is a “Money Trust” that is practically 
a central bank, without any legislative control, and that they might much better 
replace it with a real central bank that will do them some good and will be controlled. 
I can see how just such stuff as this would appeal to Wilson’s mind, but I am disgusted 
with his thinking and using such clap trap. He has told Morgenthau that the Aldrich 
Bill [which many major American banks sponsored] never can be passed, because it 
bears the Aldrich name. They have got to get up another bill which he supposes will 
have to be about 60% the Aldrich Bill to start with and probably will be 80% before 
they got it passed, but it must have another name. 

This is about as scientific an attitude toward the banking question as you would 
expect from Tim Murphy. Morgenthau tells me that [New York attorney Samuel] 
Untermeyer is preparing for a thoroughgoing campaign to begin after election—I 
believe the date is November 20th—and has got a lot of men working on it now. His 
whole ambition is to, in some way, get a white-wash for his character. He has offered 
a hundred thousand dollars (all of this is quite confidential, of course) if he can be 
assured of a foreign mission. Indeed, he would give any amount for an important one, 
and has even the audacity to think that he might possibly be appointed to England. 
Wilson will make no promises whatever and they have accepted only $10,000 as yet 
and probably will accept no more. He would also like to be Attorney General. 
Morgenthau says that, of course, is quite impossible, although he could imagine that 


he might be sent to some post of about the grade of Italy.- 

As a primary source for the study of modern American politics, 
this letter is uncommonly rich. Even on casual reading it brims with 
exciting implications for a wide range of issues now extensively 
debated by social scientists and historians—the impact of financial 
innovation on American political development, for example; or the 
relationship between congressional investigations (like that 
Untermeyer had just directed into banking practices on behalf of the 
so-called Pujo Committee) and the evolution of the national political 
agenda; or the role of professionalization in U.S. diplomacy of the 
period; or the significance of class and, perhaps, ethnic factors in elite 
politics. With more deliberate attention to the letter’s historical 
context and stylistic idiosyncrasies still more would be revealed. A 
reading that was sensitive to the political choices other leading 
businessmen made during the same election, for instance, could 
certainly throw rare light on several first-order mysteries of the great 
American organism of that epoch, notably the delicate balance of 
rivalry and cooperation that characterized the “Money Trust” before 
World War I, and the precise ways in which the preferences of its 
members, allies, and opponents translated into party politics and 
public policy. 

But perhaps the most important reflections suggested by this 
correspondence concern this essay’s central theme: the primary and 
constitutive role large investors play in American politics. For much 
about this missive’s tone and contents—the famous banker’s 
condescension toward the White House (where “the whole 
disposition was to avoid trouble and to pass the question along,” 
while—as Stillman and Vanderlip were both well aware—securing 
National City’s vital interests); the Olympian assurance which acts as 
though nothing could be more natural than that top operatives of 
both major parties should drop by for intimate campaign discussions; 
or the matter-of-fact disdain with which Vanderlip relates to Stillman 
that the “Archangel Woodrow” (as H. L. Mencken called him) 
doesn’t really believe what he is saying about what was probably the 
campaign’s prime issue—bank reform—and that he has no plans to 
appoint Untermeyer, the archenemy of the big banks, to high 
diplomatic post—almost irresistibly raises a series of subversive 
doubts about the basic conceptual framework that most recent 
studies of American politics rely on to understand the workings of 
the political system over time and as a whole. 

As summed up in the “critical realignment theory” elaborated by a 

succession of scholars since the late 1950s, this view understands 
political change primarily—though of course not exclusively—in 
terms of changing patterns of mass voting behavior. Most American 
elections, it considers, are contests within comparatively stable and 
coherent “party systems.” While any number of short-term forces 
may momentarily alter the balance of power within a particular party 
system, and cumulative, long-run secular changes may also be at 
work, the identity of individual party systems rests on durable voting 
coalitions within the electorate. So long as these voting blocs (which 
in different party systems may be defined variously along ethnic, 
class, religious, racial, sexual, or a plurality of other lines) persist, 
only marginal changes are likely when administrations turn over. 
Characteristic patterns of voter turnout, party competition, political 
symbols, public policies, and other institutional expressions of the 
distribution of power survive from election to election. 

“Normal politics,” of course, is not the only kind of politics that 
occurs in the United States. The “critical realignments” of critical 
realignment theory refer to a handful of exceptional elections—those 
associated with the New Deal and the Great Depression of the 1930s, 
the Populist insurrection of the 1890s, the Civil War, and the 
Jacksonian era are most frequently mentioned, though other dates 
have also been proposed—in which extraordinary political pressures 
find expression. Associated with the rise of new political issues, 
intense social stress, sharp factional infighting within existing parties, 
and the rise of strong party movements, these “critical” or 
“realigning” elections sweep away the old party system. Triggering a 
burst of new legislation and setting off or facilitating other 
institutional changes that may take years to complete, such elections 
establish the framework of a new pattern of politics that 
characterizes the next party system. 

With few exceptions, the higher stakes involved in realigning 
elections do not sway realignment theorists from their emphasis on 
popular control of public policy.- The sweeping changes in the 
political system that occur are again ascribed to voter sentiment. By 
raising the salience of political issues, most analysts suggest, critical 
elections facilitate a large-scale conversion of new voters from one 
party to another, or a mass mobilization of new voters into the 
political system. Either way, the partisan division of the electorate 
alters decisively. 

An illuminating and sophisticated variation on classic liberal 

electoral themes, critical realignment theory continues to be widely 
held by both social scientists and historians. It has also inspired 
increasing numbers of journalists, consultants, and political activists 
professionally concerned with interpreting political events. But in 
recent years skeptical appraisals of the theory have proliferated and 
many of its claims have come in for heavy criticism (Lichtman, 1976, 
1980, 1982; Kousser, 1980; Benson, Silbey, and Field, 1978; 
Ferguson, 1986). 

The pivotal arguments raised against conventional versions of 
critical realignment theory undermine precisely the aspect of the 
theory that the Vanderlip-Stillman exchange challenges so vividly: the 
inspired confidence in what might be termed “voter sovereignty.” As 
several studies have argued in detail, evidence is mounting that the 
durable voter coalitions which are supposed to underlie party systems 
never existed, and that so-called critical realignments are not only 
very difficult to define, but simply have not witnessed major, lasting 
shifts in voter sentiment.- In the words of one sophisticated 
quantitative study of American voting patterns by three scholars very 
sympathetic to the realignment perspective (Clubb, Flanigan, and 
Zingale, 1980, p. 119), 

[Electoral change during the historical periods usually identified as realignments was 
not in every case either as sharp or as pervasive, nor was lasting change as narrowly 
confined to a few periods, as the literature suggests. Although these periods were 
marked by both deviating and realigning electoral change, which shifted the balance of 
partisan strength within the electorate toward one or the other of the parties, these 
shifts did not involve the massive reshuffling of the electorate that some formulations 
of the realignment perspective describe. Moreover, indications of substantial 
continuity of the alignment of electoral forces across virtually the whole sweep of 
American electoral history can be observed. . . . [Electoral patterns do not, by 
themselves, clearly and unequivocally point to the occurrence of partisan realignment. 

To this evidence of massive public policy change without 
correspondingly sweeping electoral realignment, and other 
difficulties, adherents of critical realignment theory respond 
variously. The common denominator in virtually all their replies, 
however, is a determination to shore up the theory by making it even 
more complicated, “more multidimensional.” The hope is to 
supplement the already complex electoral analysis with more and 
more variables—conducting more detailed studies, for example, of 
the president and the electorate, Congress and the electorate, the 
president, Congress, and the electorate, etc.- 

But it is doubtful that such moves will do more than postpone the 
inevitable. As an earlier paper argued (Ferguson, 1986), adding 
baroque variations to already complex themes is likely only to 
generate rococo variations on the same themes—and provide very 
little additional illumination. Nor are these efforts likely to constitute 
an effective reply to the direct evidence emerging from both 
quantitative and case studies indicating that the relationship between 
public policy change and party platforms, electoral margins, and 
voting behavior is weak and unstable.- 

It is time, therefore, to recognize that the chief reason why no 
social scientists have succeeded in specifying unambiguous electoral 
criteria to identify “partisan realignment” may well be that there are 
no such criteria to be found. And it is high time, accordingly, to begin 
developing a different approach—a fresh account of political systems 
in which business elites, not voters, play the leading part; an account 
that treats mass party structures and voting behavior as dependent 
variables, explicable in terms of rules for ballot access, issues, and 
institutional change, in a context of class conflict and change within 
the business community. 

The present paper represents an attempt to revise conventional 
accounts of American party systems and critical realignments along 
precisely these lines. Parties, the paper argues, are not what critical 
realignment theory (and most American election analyses) treat them 
as, viz., as Anthony Downs defined them in his celebrated 
formalization of the liberal (electoral) model of parties and voters, 
the political analogues of “entrepreneurs in a profit-seeking 
economy” who “act to maximize votes” (Downs, 1957a, pp. 295 and 
300). Instead, the fundamental market for political parties usually is 
not voters. As a number of recent analysts have documented 
(Burnham, 1974, 1981; Popkin et ah, 1976; Ginsberg, 1982), most of 
these possess desperately limited resources and—especially in the 
United States—exiguous information and interest in politics. The real 
market for political parties is defined by major investors, who 
generally have good and clear reasons for investing to control the 
state. In a two-party system like that of the United States, 
accordingly, incidents like those recounted in Vanderlip’s letter to 
Stillman are far more typical of U.S. parties than the usual median 
voter fantasy. Blocs of major investors define the core of political 
parties and are responsible for most of the signals the party sends to 
the electorate. 

During realignments, I shall argue, basic changes take place in the 
core investment blocs which constitute parties. More specifically, 
realignments occur when cumulative long-run changes in industrial 
structures (commonly interacting with a variety of short-run factors, 
notably steep economic downturns) polarize the business community, 
thus bringing together a new and powerful bloc of investors with 
durable interests. As this process begins, party competition heats up 
and at least some differences between the parties emerge more 

Since the business community typically polarizes only during a 
general crisis, it is scarcely surprising that in such cases voters also 
begin to shake, rattle, and roll. Only if the electorate’s degree of 
effective organization significantly increases, however, does it receive 
more than crumbs. Otherwise all that occurs is a change of personnel 
and policy that, because it may reflect nothing more than a vote of no 
confidence in the current regime, bears no necessary relation to any 
set of voting patterns or consistent electoral interests. Assuming that 
the system crisis eventually eases (possibly, but not necessarily , 
because of any public policy innovation), the fresh “hegemonic bloc” 
that has come to power enjoys excellent prospects as long as it can 
hold itself together. Benefiting from incumbency advantage and the 
chance to implement its program, the new bloc’s major problem is to 
manage the tensions among its various parts, while of course making 
certain that large groups of voters do not become highly mobilized 
against it—either by making positive appeals to some (which need 
not be the same from election to election) or by minimizing voter 
turnout, or both. 

The discussion comprises the following major sections. 

Section 2 outlines the basic notions of the investment theory of 
parties and applies them to the problem of critical realignment. This 
effort involves two separate tasks: first, to explain clearly why voters 
can only rarely define public policy through elections; second, to 
indicate how businesses (and, in some party systems, labor or middle- 
class organizations) importantly influence or control political parties 
and elections. Now the first problem, the paper argues, has already 
been completely solved by recent contributions to the so-called 
economic theory of democracy developed by Downs and other 
theorists. Also, the paper proposes that by pursuing the logic of the 
arguments developed in one of these recent essays, “What Have You 
Done for Me Lately? Toward an Investment Theory of Voting” 

(Popkin et al., 1976), an easy solution materializes to the second—the 
question of how elections and policies are in fact controlled. Building 
on these arguments, the present paper contrasts the “investment 
theory of political parties” point by point with conventional voter- 
centered models of elections. As part of this exercise, the paper 
reconsiders aspects of Mancur Olson’s famous analysis of The Logic 
Of Collective Action to gain a clearer view of the unique advantages 
major investors enjoy in providing themselves with what look to all 
other actors in the system like “public goods” (Olson, 1971). 

How to test the theory is considered next. Section 3 begins with a 
brief discussion of criteria for recognizing “large” investors and 
similar definitional issues. To demonstrate the existence and stability 
of the investor coalitions that the theory posits, the paper develops a 
method for the graphical analysis of industrial (and, where necessary, 
agricultural) structures. By analyzing how blocs of investors whose 
interests center in different parts of the economy map into 
multidimensional issue space, this technique produces spatial models 
of the distribution of major investors within the political system— 
models that can be estimated with actual data to reveal whether a 
coalition really exists. When analyzed developmentally, such models 
can also indicate whether these coalitions are becoming more or less 

Section 4, the longest part of the paper, presents a series of 
sketches of the major investor blocs that have dominated the various 
party systems in American history. Necessarily stylized and subject to 
further revision, these accounts largely bring together research 
gathered for longer studies which have appeared or will appear 

Finally, section 5 ties up loose ends and considers the possibilities 
for enhancing the power of ordinary voters in advanced industrial 
societies in light of the investment theory of parties. 


Ironically, it was Anthony Downs’s classic formalization of the 
liberal theory of elections and public policy which took the first and 
perhaps most important step down the path toward an alternative 
account. For by the middle of An Economic Theory of Democracy , 
Downs (1957a, p. 258) concluded: 

The expense of political awareness is so great that no citizen can afford to bear it in 
every policy area, even if by doing so he could discover places where his intervention 
would reap large profits. 

This and similar observations led Downs into a pathbreaking analysis 
of the costs and benefits of becoming informed about public affairs 
and choosing between alternative courses of action. At several points 
Downs recognized that the logic of an information cost model 
potentially undermined democratic control of public policy, for if 
voters cannot bear these costs they have no hope of successfully 
supervising the government.- But Downs did not finally give much 
empirical weight to this possibility, and his work became famous as a 
demonstration of how voters controlled government policy in 
countries similar to the United States.- 

More recent analysis has demonstrated, however, that serious 
application of Downs’s ideas about information costs to actual 
political systems leads to many striking conclusions, which stand 
both traditional voting analyses and Downs’s preferred models of 
democratic control on their heads. 

The most important of these contributions is that of Samuel 
Popkin and his associates. A pioneering attempt to incorporate the 
cost of obtaining and processing information into the analysis of 
voter behavior, their paper presents a detailed critique of the 
conventional “socialization” approach to partisan identification and 
mass political choices. In this view, which work done during the 
1950s on The American Voter (Campbell, et ah, 1960) appeared to 
support, an individual’s attachments to political parties are shaped by 
non- or a-rational group and family socialization experiences 
involving a minimum of cognitive orientation.- By reanalyzing data 
presented in several earlier studies along Downsian lines, however, 
Popkin et al. demonstrate that the orientation of most voters toward 
politics is and has been primarily cognitive rather than affective. 

Following a path Downs himself briefly explored,— Popkin et al. 
suggest that voters are only acting rationally when they cut 
information costs by using shortcuts like partisan identification or 
demographic facts to evaluate complex vectors of political variables. 
But—and here lies one major part of their paper’s interest for this 
essay—Popkin et al. (1976, p. 787) also provide a clear argument and 
a series of vivid examples illustrating how, in a political system like 

that of the United States, where even highly motivated voters face 
comparatively enormous costs when they attempt to acquire, 
evaluate, and act upon political information, effective electoral 
control of the governmental process by voters becomes most unlikely: 

[T]he understanding that information is costly leads to expectations about the voter 
which differ from those of the SRC or citizen-voter [i.e., “socialization”] model. 
Whereas citizen-voters are expected to have well developed opinions about a wide 
range of issues, a focus on information costs leads to the expectation that only some 
voters—those who must gather the information in the course of their daily lives or 
who have a particularly direct stake in the issue—will develop a detailed 
understanding of any issues. Most voters will only learn enough to form a very 
generalized notion of the position of a particular candidate or party on some issues, 
and many voters will be ignorant about most issues. 

As a consequence it is not necessary to assume or argue that the 
voting population is stupid or malevolent to explain why it often will 
not stir at even gross affronts to its own interests and values. Mere 
political awareness is costly; and, like most of what are now 
recognized as “collective goods,” absent individual possibilities of 
realization, it will not be supplied or often even demanded unless 
some sort of subsidy (at least in the form of advertising) is supplied 
by someone.— 

To further clarify the issues involved in the decision to participate 
in collective action under uncertainty, Popkin et al. introduce their 
most striking idea—the notion that political action should be 
analyzed as investment , with “the simple act of voting” requiring at 
least an investment of time and attention as a limiting case.— 

Now, this suggestion has many exciting implications—too many 
implications, indeed, for this paper to assess. Consider, for example, 
how non-Downsian it is at its core. Though Popkin et al. generally 
claim they are following Downs, conventional neoclassical exchange 
theories provide the basic framework for most of Down’s work. 
While, as mentioned earlier, Downs pioneered the analyses of 
investment, he did not pursue the sweeping implications of his 
results. As a consequence, in his presentation investment enters 
largely as a further complication in a more detailed model of voter 
control. Because investment does not really emerge as a prominent 
theme in its own right, neither Downs nor later analysts who share 
his methodological bent have fully recognized the implications of 
their own theory. As Joan Robinson and other critics of neoclassical 
microeconomics have observed, even the simplest acts of investment 

imply change over time and accordingly are almost impossible to 
incorporate into the general equilibrium framework that Downs 
himself champions as an ideal (Robinson, 1971, Chap. 1). Similar 
logic also inspires John Roemer’s insufficiently appreciated 
observation that much politically relevant behavior involves 
shattering the boundaries of what most microeconomic analysts too 
hastily identify as the “feasible set.”— 

For this paper, however, the chief importance of the investment 
analysis of Popkin et al. lies in the possibility of its consistent 
extension to political parties. In several passages strongly reminiscent 
of parts of Burnham’s work, Popkin et al. (1976) sharply criticize the 
Michigan group for assuming that most individuals can normally 
afford to contest outcomes that are products of a whole system 
whose scale is many times that of the average voter. 

The SRC also assumed that the major barriers to participation were internal to the 
individual. In 1960 they stated “[t]he greater impact of restrictive electoral laws on 
Negroes is, in part at least, a function of the relatively low motivational levels among 
Negroes.” The increase of participation among black voters in the 1960’s is, of course, 
a clear example of a situation where political participation as well as political interest 
and involvement, rather than being fixed expressions of individual motivation, 
responded instead to an increase in investment opportunities and a legal decision by 
Congress to reduce the cost (or more aptly, to provide subsidies to aid blacks in paying 
the costs) of voting, (p. 790) 

In the investor voter model, interest, involvement, and participation depend on the 
voter’s calculation of the individual stakes and costs involved in the election; included 
in this calculation are the voter’s issue concerns and his estimates of his opportunities 
for participation. As a result, much of the stigma of “apathy” is transferred from the 
voter to the electoral system, (pp. 789-90) 

Instead of arguing that irresponsible voters lead to irresponsible parties, we argue 
that a fragmented system with weak parties leads to information problems for the 
individual voter which make the best possible decisionmaking strategies less than 
ideal, (p. 795) 

But despite their inspired and often very amusing beginning, Popkin 
et al. do not pursue their inquiry to its logical conclusion. Their 
analysis points out the vast disproportion between what the 
individual voter-investor can afford and the range of potential 
information and action in principle available to him or her, and 
exposes the flimsiness of much of the “spatial modeling” now 
popular in political science, but there it halts. Remaining content 
with an investment theory of voting , Popkin et al. refrain from taking 

the obvious next step. They do not broach the question that their 
study clearly implies: if ordinary voters can’t afford to invest much in 
American political parties, then who can? And by virtue of their 
unique status, do not these “big ticket” investors automatically 
become the real masters of the political system? 

Raising these questions, I think, transports one to the heart of the 
disastrous misunderstanding of the nature of political parties 
inscribed at the center of the Downsian approach to political parties 
(and its less formal ancestors). For what can be taken as the core 
proposition of the “investment theory of political parties ” denies the 
validity of the Downsian treatment of parties as simple vote 
maximizers. Instead, the investment theory of parties holds that 
parties are more accurately analyzed as blocs of major investors who 
coalesce to advance candidates representing their interests. 

As should momentarily become apparent, this proposition does not 
imply that such investor blocs pay no attention to voters. It does, 
however, mean that in situations where information is costly, 
abstention is possible, and entry into politics through either new 
parties or existing organizations is expensive and often dangerous 
(that is, in the real world in which actual political systems operate) 
political parties dominated by large investors try to assemble the 
votes they need by making very limited appeals to particular 
segments of the potential electorate. If it pays some other bloc of 
major investors to advertise and mobilize, these appeals can be 
vigorously contested, but—and this is the critical deduction which 
only an investment theory of parties can draw—on all issues affecting 
the vital interests that major investors have in common, no party 
competition will take place. — Instead, all that will occur will be a 
proliferation of marginal appeals to voters—and if all major investors 
happen to share an interest in ignoring issues vital to the electorate, 
such as social welfare, hours of work, or collective bargaining, so 
much the worse for the electorate. Unless significant portions of it are 
prepared to try to become major investors in their own right, through 
a substantial expenditure of time and (limited) income, there is 
nothing any group of voters can do to offset this collective investor 

While the “principle of noncompetition” over the vital interests of 
all major investors constitutes the most important predictive 
difference between the investment and the Downsian theory of 
political parties, it is scarcely the only one. A whole series of 

contrasts can be drawn between them. 

1. Downsian theory privileges voters, ivho are said to exercise control over at least the 
broad shape of public policy. The investment theory holds that voters hardly count 
unless they become substantial investors. When the ranks of significant investors are 
limited to relatively small numbers of elite actors commanding disproportionate shares 
of politically mobilized resources, mass voting loses most of its significance for 
controlling public policy. Elections become contests betiveen several oligarchic parties, 
whose major public policy proposals reflect the interests of large investors, and which 
minor investor-voters are virtually incapable of affecting, save in a negative sense of 
voting (or nonvoting) “no confidence.” 

Because the claims made by the investment theory of parties can 
easily be misunderstood, the logic of the underlying argument is 
worth pursuing a bit further. Two points in particular require 
clarification: one relates to the potential role of voters according to 
the theory; the other, involving a rather complicated set of 
considerations growing out of the “rational choice” literature that 
Popkin et al. rely on, concerns the precise nature of some of the 
advantages large investors enjoy when they act politically. 

In regard to voters, what the investment theory of parties does not 
say is every bit as important as what it does say. The theory does not 
deny the possibility that masses of voters might indeed become the 
major investors in an electoral system, or that, if they did so, 
conditions approximating a Downsian ideal of voter sovereignty 
might exist. As a later section briefly illustrates in discussing the 
expansion of unions during the New Deal, such conditions are 
conceptually very clear and empirically identifiable. To effectively 
control governments, ordinary voters require strong channels that 
directly facilitate mass deliberation and expression. That is, they must 
have available to them a resilient network of “secondary” 
organizations capable of spreading costs and concentrating small 
contributions from several individuals to act politically, as well as an 
open system of formally organized political parties. Both the parties 
and the secondary organizations need to be “independent,” i.e., 
themselves dominated by investor-voters (instead of, for example, 
donors of revokable outside funds). Entry barriers for both secondary 
organizations and political parties must be low, and the technology 
of political campaigning (e.g., cost of newspaper space, pamphlets, 
etc.) must be inexpensive in terms of the annual income of the 
average voter. Such conditions result in high information flows to the 
grass roots, engender lively debates, and create conditions that make 
political deliberation and action part of everyday life. What the 

theory claims is merely that in the absence of these conditions a party 
system that is competitive in the relevant Downsian sense cannot 
prevent a tiny minority of the population—major investors—from 
dominating the political system. The costs that the voters must bear 
to control policy will be literally beyond their means. 

A proper analysis of the reasons why large investors are likely to 
dominate political systems, however, need not rest with the 
observation—however weighty—that, to paraphrase Hemingway, the 
rich are different because they have more money. By pursuing several 
themes in the literature on economic theories of politics that Popkin 
et al. draw upon, we see that a more subtle picture emerges of the 
special position that large investors occupy in a political system. 

There is first of all a point whose potential importance was clearly 
recognized by Downs, though I do not believe that he ultimately 
accorded it sufficient weight (Downs, 1957a, Chap. 13). This is the 
simple fact that much of the public policy-relevant information that 
voters must pay heavily in time or money to acquire comes naturally 
to businesses (i.e., major investors) in the daily course of operations. 

Closely related to this edge that large investors enjoy in acquiring 
information are the advantages they usually command in analyzing it. 
Computers engaged to service customers, for example, easily perform 
all sorts of politically relevant tasks. Perhaps a little less obviously, 
the business contacts that an international bank maintains also 
constitute a first-rate foreign-policy network. And the sometimes thin 
line separating normal advertising from lobbying virtually disappears 
for many producers of major weapons systems. 

In many cases vast economies of scale further enhance the position 
of large investors. What is for a voter an absolutely prohibitive 
expense a large firm can afford on a regular basis. As long ago as the 
eighteenth century, for example, large investors routinely consulted 
their lawyers before making major moves. Two hundred years later, 
these consultations are likely to be done in a committee which 
includes not only lawyers but also public relations advisers, lobbyists, 
and political consultants.— In sharp contrast to voters, for whom 
even jury duty can become an onerous burden, large firms also can 
easily afford to divert personnel to special projects. 

Still other advantages armor what is sometimes cited as the 
Achilles’ heel of large investors—their very size and frequent diversity 
of interests (Bauer, Poole, and Dexter, 1972). Modern management 
structure developed precisely to afford top executives the capacities 

for detailed command and control that they need to adjudicate 
conflicts within the firm and to optimize complex sets of interests. - 
Such organizational forms, along with the informal retinue of 
advisers large investors have always maintained, constitute uniquely 
institutionalized “memories” that dwarf the resources available to 
most voters. 

Olson’s well-known study The Logic of Collective Action 
demonstrates that, in addition to all these advantages, major 
investors also derive subtle but decisive benefits from certain general 
characteristics of the process of interest intermediation and 
articulation (Olson, 1971).* Both because several of the most 
significant consequences of Olson’s argument have not as yet been 
integrated into empirical research and because his own applications 
of it to the business community were cursory and, in part, 
misleading, his analysis is worth retracing in some detail. 

Its initial stages have been well summarized by Barry (1970, p. 24): 

Olson’s argument is intended to apply wherever what is at stake is a “public good,” 
that is, a benefit which cannot be deliberately restricted to certain people, such as 
those who helped bring it into existence. A potential beneficiary’s calculation, when 
deciding whether to contribute to the provision of such a benefit, must take the form 
of seeing what the benefit would be to him and discounting it by the probability that 
his contribution would make the difference between the provision and the non¬ 
provision of the benefit. 

In a world in which most collective goods can be safely assumed to 
be beyond the means of isolated individuals, Olson’s formal theory of 
collective action follows directly from his judgment that the 
probability that one actor’s decision to contribute will influence 
another’s drops steeply with increases in the size of the group which 
will enjoy the collective good (see Olson, 1971, p. 44): 

In a small group in which a member gets such a large fraction of the total benefit that 
he would be better off if he paid the entire cost himself, rather than go without the 
good, there is some presumption that the collective good will be provided. In a group 
in which no one member got such a large benefit from the collective good that he had 
an interest in providing it even if he had to pay all of the cost, but in which the 
individual was still so important in terms of the whole group that his contribution or 
lack of contribution to the group objective had a noticeable effect on the costs or 
benefits of others in the group, the result is indeterminate. ... By contrast, in a large 
group in which no single individual’s contribution makes a perceptible difference to 
the group as a whole, or the burden or benefit of any single member of the group, it is 
certain that a collective good will not be provided unless there is coercion or some 
outside inducements that will lead the members of the large group to act in their 
common interest. 

Now, this argument is of course subject to all the limitations of its 
premises, which include two that have frequently become targets for 
criticism: that human behavior is an exercise in rational calculation 
and that it is exclusively self-interested. — But it is doubtful if the 
criticism in this vein that Olson’s argument has received makes much 
difference. It is possible to agree that strictly neoclassical approaches 
to political economy invidiously neglect ideology. One can therefore 
endorse the search for a more comprehensive theory of action. It is 
equally possible to reject Olson’s implicit assumption that action is 
always a cost rather than a good in itself, and allow that the process 
of collective action can become a uniquely rewarding experience in its 
own right. And anyone can recognize that the assumption that 
humans are exclusively self-seeking may sometimes be a potentially 
serious distortion of reality even in a capitalist society. 

But unless one is prepared to make truly heroic counter¬ 
assumptions, Olson’s fundamental point is likely to stand. 
Expectations that large groups of people will voluntarily provide 
huge subsidies over long periods of time to projects that return no 
benefit to themselves (and may often be completely wasted) is 
unlikely to prove fruitful as an approach to most of human history— 
and particularly to the analysis of market societies. As rival accounts 
of collective action put forward by Olson’s critics inadvertently 
illustrate when they initially posit the origins of collective action in 
attempts to escape misery and deprivation, reason (or history) may be 
cunning, but it is rarely philanthropic: much, probably most, 
collective action undertaken is straightforwardly instrumental and 
animated by perfectly ordinary passions.— Most of it, accordingly, 
should follow the basic logic of Olson’s model. 

But while his general analysis identifies an important reason for 
expecting small groups of large investors to display capacities for self¬ 
organization far beyond the capability of ordinary citizens, Olson’s 
actual application of his model to the business community is perhaps 
the least satisfying section of his work. 

In part this is almost certainly the consequence of an ambiguity in 
his original presentation that has a most important bearing on its 
implications for large investors. If Olson is correct, one would expect 
to find many instances in American history in which relatively small 
groups of major investors organized and bore most of the costs of 
political campaigns directed toward ends that greatly benefited 
themselves. Since in the United States most of what the state provides 

is formally provided for the benefit of the whole population, these 
investor groups would therefore supply collective “goods” to the rest 
of the country in the perhaps elongated technical sense that Olson 
employs the term.— And, indeed, though many contemporary social 
scientists often are unable to distinguish accounts of small groups of 
major investors efficiently providing themselves with public goods 
from outlandish and improbable “conspiracy theories,”— American 
history is replete with vivid examples of the fundamental asymmetry 
Olson’s account suggests between the markets for collective action 
enjoyed by the rich and poor, respectively. Three of the greatest 
investors in the United States, for example, virtually financed the 
later stages of the War of 1812 all by themselves (Brown, 1942, p. 
126; Hammond, 1957, pp. 231-32). Much of the money required for 
the force that quelled Shays’s Rebellion came from a handful of very 
affluent (and very nervous) investors.— The original promoters of 
what eventually became the Brookings Institutions were a bloc of 
investors frankly hoping to reduce their taxes by curbing federal 
spending (by promoting the establishment of what became the Budget 
Bureau), while another group of millionaires bore the lion’s share of 
the costs for the effort to repeal Prohibition with the no less bluntly 
declared aim of reducing their taxes through the taxation of liquor 
(which the poor would pay). - 

Oddly, however, Olson discounts such cases as “empirically 
trivial” (1971, p. 48, no. 68). He does this because in addition to 
making his main argument (discussed earlier), which relates group 
size to the likelihood that individual action can decisively affect the 
provision of a collective good (for instance, by the influence of one’s 
example on others), he also develops another line of thought. In this 
second account he tries to derive his proposition that large groups 
will not provide themselves with collective goods (absent coercion or 
selective incentives) directly from an analysis of how an individual’s 
share of a collective good varies with group size.— 

Now, this is an exceedingly dangerous way to make the case. For 
as Olson himself is well aware, the only calculation strictly relevant 
to deciding whether an individual will participate in collective action 
relates to the net advantage that accrues to that individual from that 
action. While there is no reason anyone who wishes to cannot relate 
this condition of the total gains to the group as a whole (by simply 
forming the appropriate ratios), additional formulations simply 

distract from this crucial point. And, as an examination of Olson’s 
mathematical presentation shows, his efforts on this score led him 
into an error that has no consequences for his basic argument but 
which obscures the vitally important case of major investors who 
provide themselves and the country as a whole with collective 

Olson’s own discussion of the business community is very brief, 
and largely confined to underscoring the conclusion that industries in 
which only a small number of firms compete will find it easier to 
organize. Cursory and highly stylized, it makes no sustained effort to 
engage empirical material (1971, pp. 141-48). 

Many of the most interesting implications of his findings are not 
discussed at all. For example, if one accepts Olson’s arguments about 
the difficulties of achieving coordination in decentralized industries, 
then large merger waves, such as the United States experienced in the 
1890s, 1920s, and more recent past, acquire potential political 
significance. Mergers, in effect, are a prime method by which actual 
businesses solve their collective action problems. Also, if Olson is 
correct, then the usual neoclassical dismissal of the importance of 
“aggregate” (in contrast to particular “industry”) concentration is 
probably mistaken, for it is clear that the scope of rivalry among a 
few giant firms which can coordinate and trade off operations in 
many industries at once will be vastly different from highly atomized 
and decentralized competition.— 

The most significant omissions in Olson’s discussion of collective 
action within the business community, however, concern his neglect 
of the financial system and the potential role of coercion (even) 
within market systems. The former is important because the strategic 
position that leading financiers enjoy in many economies may at least 
partially solve free-rider problems among businessmen. Of course, 
the leverage banks can exert over other enterprises varies with many 
factors, including the secular trend of economic growth, the business 
cycle, and, obviously, the development of credit markets.— No less 
clearly, the interests being served in such cases may not be those of 
“business as a whole” or some similarly exalted abstraction, but 
primarily those of the banks themselves. But it is probably no 
accident that empirical studies of really powerful cross-sectoral 
business organizations like the Business Council or the Committee for 
Economic Development (CED)—neither of which Olson mentions— 

reveal the omnipresence of big banks.— And a long search I 
undertook of private records yielded direct evidence of pressure 
banks exerted on reluctant industrialists to enroll in the CED.— 

Olson’s analysis should also stimulate a re-evaluation of the role 
coercion plays among large investors. Both Olson and his critics 
dwell overmuch on the “voluntary” character of social interactions. 
When he discusses individual cases, Olson customarily breaks off the 
discussion after he reaches his conclusion that, while huge gains 
accrue to groups which succeed in organizing themselves, absent 
coercion or selective incentives this is quite unlikely.— By contrast, 
many of his critics, concerned either to reestablish the rationality of 
large group organizing efforts, or, more rarely, bothered that reality 
seems to provide more examples of successful collective action by 
large groups than theory predicts, often reply by tracing out 
arabesques of increasingly farfetched reasoning which might lead a 
large group to come together voluntarily in its own interest. But of 
course, the real alternatives facing a group with free-rider problems 
frequently include options more lively than dialogue among the 
members to build up a perhaps irrational mutual trust (Offe and 
Wiesenthal, 1980), encouraging the probably mistaken realization 
that none can hope to advance independently of the others (Roemer, 
1978), or even locally based federation (which, since it associates 
small groups, fits Olson’s model as a part to collective action.) 
Specifically, it often is the case that the real “logic of collective 
action” for a large group with a vital interest at stake is the swift 
application (by some—perhaps self-appointed—subgroups) of 
coercion to erring members of the larger group. 

Of course Olson, and his readers, are all perfectly well aware that 
coercion, force, violence, terror, and such practices are possibilities 
for social groups. The point, however, is that only in his discussion of 
labor unions does Olson energetically pursue the strategic trail in this 
direction (1971, pp. 66 ff.). Yet there is no reason to single out 
unions (or managements confronting unions). In general, any group 
of rational actors seeking to organize a large group will experience 
the same incentives—including major investors in the business 
community organizing various sorts of political coalitions. 

American history is replete with examples of business groups and 
individual firms retaining vast arrays of military and paramilitary 
forces for long periods of time. In the nineteenth century many 
railroads kept private armies. The Pennsylvania Coal and Iron police 

ran their own Obrigkeitsstaat for decades. General Motors 
maintained the Black Legion; Ford sported a veritable Freikorps 
recruited by the notorious Harry Bennett; and any number of 
detective agencies, goon squads, “special consultants,” and 
wiretappers have also been active.— That most of these—though 
clearly not all, for railroads often fought pitched battles with 
competitors—are usually said to have been directed at labor makes 
little difference. While this claim does underline the quasi-military 
character of many of the most important cases of collective action in 
American life, there is little reason to believe that it represents the 
whole truth. Force on such a scale potentially menaces competitors, 
buyers, and suppliers almost as much as it does workers.— 

It is true that market forces place definite limits on the scope for 
coercion within the business community. But as the earlier reference 
to financial pressure on businesses should suggest, even an economy 
that might be reasonably competitive in the long run contains all 
sorts of imperfections and uncertainties that leave plenty of scope for 
direct pressure. Accordingly, it ought to surprise no one if, especially 
in times of extreme emergency, as, for example, during a war or 
strike wave, many businessmen turn rapidly to structures that contain 
strong elements of coercion—either by (some part of) themselves, 
emergency provisions in a liberal constitution, or, in truly dire 
emergencies, a Fiihrer. And in less straitened circumstances political 
coalitions should be scrutinized carefully for elements of coercion as 
well as voluntary accord even within dominant groups. 

2. Inside political parties, Downsian theory focuses all the attention on professional 
politicians. Investment theory takes care riever to confuse investors/employers with 

The investment theory of politics does not deny that candidates 
and professional politicians have a great stake in their success, or 
indeed that they might have a greater interest than their major 
backers in winning at almost any price. But investment theories 
maintain that political organizations are (sometimes very complex) 
investments; that, while they need small amounts of aid and 
commitment from many people, most of their major endorsements, 
money, and media attention typically come as direct or indirect 
results of their ability to attract heavyweight investors. As a 
consequence not even former presidents with enormous personal 
popularity like Theodore Roosevelt could run insurgent campaigns 

without support from investors like U.S. Steel or investment banker 
George Perkins. - In addition, for all the attention Downsian 
theorists focus on offices as the primary lure for candidates and 
parties, the investment theory of parties expects that a fairly clear 
distinction exists between routine lower-level appointments, with 
limited discretion and established formal and informal role 
expectations, and top policymaking slots. These latter, the investment 
theory of parties anticipates, are often reserved for representative 
major investors or their immediate designates (Ferguson, 1986). 

3. Downsian theory expects parties to move near the voters on important policy 
dimensions and, indeed, often even “leapfrog” rivals in their haste to find the median 
voter. The investment theory expects very modest moves toward the public on all 
issues affecting major investors, rocklike stability toward the vital interests of these 
investors, and many efforts to adjust the public to the parties’ views rather than vice 


The Vanderlip-McAdoo-Hilles deliberations regarding the Federal 
Reserve System discussed earlier, or the many other examples 
American history offers of major party candidates who flatly refused 
to take immensely popular steps opposed by almost all major 
investors (such as abandoning a balanced budget to extend relief 
during major economic downturns)— should embarrass Downsian 
theory but scarcely the investment theory of parties. On the contrary, 
if, for example, George McClellan in 1864, Horatio Seymour in 
1868, Rutherford Hayes in the late 1870s, Grover Cleveland in the 
1880s and 1890s, Alton Parker in 1904, William Howard Taft in 
1912, all major party candidates in 1924 and 1932, Alfred Landon in 
1936, Barry Goldwater in 1964, Jimmy Carter in 1980, and any 
number of other presidential candidates all expressly repudiated 
major factions of their party immediately ahead of closely contested 
elections, the investment theory just looks for the investors who 
insisted on having their way.— 

4. Downsian theory anticipates competition between the parties on most issues; the 
investment theory of parties, on the contrary, expects that whole areas of public policy 
will not be contested at all, while on others the parties will differ like Ford and GM 
before the Japanese arrived. 

Downs hedged his original analysis of political dynamics with all 
sorts of qualifications about single-peaked preferences, etc. 
Subsequent commentators added a variety of other caveats, of which 

those concerning the number and types of issues contested were 
probably the most important (Stokes, 1966). But neither Downs nor 
most of his critics ever indicated they believed that most major 
parties in advanced industrial societies would actually fail to compete 
on many important issues in which the interests of many citizens 
were fairly clearly defined, or could, through political campaigning, 
readily be defined. Nor, so far as I can discover, did anyone ever do 
more than glance at systematic pressures put on parties not to make 
issues out of certain questions of public policy or entertain the 
possibility that both major parties (in a two-party system) would 
regularly do precisely this. To the investment theory of political 
parties, of course, nothing is more natural. If all major investors 
oppose discussing a particular issue, then neither party is likely to 
pick the issue up—no matter how many little investors or 
noninvestors might benefit—not because of any active collusion 
between parties but because no effective constituency exists to force 
the issue onto the public agenda. 

Also, the investment theory of parties would scarcely be surprised 
to discover that the major parties in party systems marked by great 
economic inequality or sharp swings in national income often confine 
almost all competition to noneconomic issues less threatening to elite 
investors. This does not, it should be observed, imply that political 
parties generate these noneconomic cleavages. It says merely that, if 
an emphasis on noneconomic issues protects major investors in all 
parties, then emphases on ethnic, racial, or cultural values will 
proliferate relative to economic appeals. And, the investment theory 
adds, studies of voting behavior that cite ethnocultural voting 
patterns congruent with such partisan appeals as evidence against 
older economic interpretations of U.S. political behavior are invalid 
in principle.— Without an analysis of party leadership and public 
policy output, the voting patterns cannot be interpreted. 

The contrast between the Downsian and the investment theory of 
political parties could go on indefinitely and with endless refinement. 
But the implications for this paper on critical realignments should 
now be clear: for all its merit and intellectual interest, Downs’s An 
Economic Theory of Democracy misspecifies the basic market in 
which political parties operate. Not voters but investors constitute 
their fundamental constituency. 

Once this central point is clarified, a revised approach to the 
definition of party systems and critical realignments becomes 

immediately available. If, according to the investment theory of 
parties, political parties are constituted by “core” blocs of major 
investors interested in securing a small set of specific outcomes, then 
“party systems” are the systems of action organized by these major 
investment blocs. Depending on the relative strength of the 
contending blocs, several different types of “party systems” can be 
distinguished. In rare cases (such as the Era of Good Feeling after the 
War of 1812) virtually all major investors may be organized into one 
massive, utterly “hegemonic” bloc, so that national party 
competition literally ceases to exist. Similarly, even where 
competition between rival blocs has brought into being another 
party, one investment bloc may still strongly dominate the other. 
Where one bloc succeeds in controlling most outcomes and reducing 
its opponents to variations on its themes (as, for example, the 
Democrats did to the Republicans for years after the New Deal), it 
also makes sense to continue to refer to the dominant bloc as 
“hegemonic,” though this case is clearly very different from instances 
where no organized opposition exists at all. Where no one party 
exercises hegemony, rival blocs will simply be “competitive.” Since 
the identity of parties—and thus of a party system—depends on the 
blocs that make them up and not on whether some party happens to 
win or lose, it is perfectly reasonable to speak of a party system as 
decaying over time from hegemony to competitive status, or even as 
having a life cycle, provided that is understood as referring, say, to 
changes in the relative power of various elements composing a once- 
dominant bloc or to minor shifts between the parties. And, obviously, 
party systems also pass away. In theory this could happen by slow 
change of identity in an industrial equivalent of Key’s “secular 
realignment” (which could lead to tedious definitional arguments).— 
In actual fact, however, for reasons adumbrated in the next section, 
all but the first American party system ended catastrophically in brief 
critical realignments that ushered in new and notably different party 

Also, in the spirit of the earlier analysis of the crucial role size 
differentials among coalition partners play in political coalitions, one 
would expect that a bloc that is hegemonic for any length of time 
might be—in Gramsci’s famous phrase—“crowned” by a particularly 
outsized and active unitary (or near unitary) actor. Because of its 
disproportionate size relative to the rest of the coalition, and its 
relatively enormous stake in the system as a whole, this “hegemon” 

often becomes the final source of the emergency subsidies any 
political coalition sometimes requires. Its prominence within the 
system may also afford it some scope for coercion, which also will 
help keep the bloc together. 


Many discussions of the methodological issues involved in testing 
highly abstract social science theories strongly resemble Sunday 
morning radio broadcasts. Inspired more by a desire to protect a 
license than by any audience demand for the information, they fill the 
air with a hodgepodge of pious cant and sententious banality that 
only rarely connects to real problems. At the risk of further 
blackening the good name of empirical social science, however, some 
discussion of methodology is indispensable in this paper, for it is 
perfectly obvious that any number of questions are likely to arise 
naturally in the course of operationalizing the theory just sketched. If, 
for example, blocs of major investors constitute party systems, then 
how should one distinguish “major” from “minor” investors? For 
that matter, just exactly who or what constitutes an “investor” in the 
relevant sense? 

Assuming that these notions can be satisfactorily elucidated, what 
counts as evidence for claims that major investors “support” 
particular candidates, issues, and parties? Still more importantly, let 
us agree for the sake of argument that the evidence shows that 
powerful blocs of investors have actually massed behind different 
parties at different times. How can the existence and stability of such 
coalitions over the course of a whole party system be demonstrated? 
Without evidence on these points the investment theory of parties is 
vulnerable to the same sort of embarrassments that electoral theories 
endured when tests failed to reveal the stable voting blocs persisting 
through the “party systems” that they were supposed to define. And 
finally, of course, how does one recognize and deal with situations 
which the investment theory itself acknowledges, when major 
investors do not dominate a party system and something like effective 
mass democracy actually occurs? 

Not all of these questions are equally urgent. The first, for 
example, sounds far more profound than it really is, and can be dealt 

with summarily. Essentially the investment theory of political parties 
postulates that a strong relationship exists between the extremes (or 
“tails”) of two different distributions; the distribution of investors in 
political action and the distribution of investors in the circumambient 
economy. In testing the theory nothing important depends on the 
exact values of the cutoff points used to indicate “large” investors in 
each distribution—the top 5 percent, 10 percent, 12 percent, or 
whatever.— So long as both distributions actually are skewed, large 
investors can be meaningfully distinguished, though, of course, in any 
case study specific characteristics of a particular skewed distribution 
are almost certain to become important facts. - 

The closely related question of who or what counts as an 
“investor” also sounds more penetrating than it really is. As the 
proliferating literature on managers, owners, and corporate control 
suggests, identifying the locus of working control in certain 
organizations can be difficult and time-consuming (Herman, 1981; 
Burch, 1972; Zeitlin and Norwich, 1979). In some cases, accordingly, 
unravelling the identity of the relevant “investors” may be tedious 
and complicated. But there is little point to pursuing such 
considerations here. The significant operational point is plain: 
depending on the historical period, the relevant investing units could 
be individuals, partnerships, firms, foundations, financial groups, or, 
in cases where the fortunes of particular families or individuals are 
centrally invested and controlled, a “fortune.” In rare cases, a state 
agency or bureaucracy might also be considered a “major investor,” 
as could the exceptional case mentioned earlier, of an autonomously 
acting division of a large firm going into business on its own. Beyond 
the jejune injunction that empirical inquiries into these questions 
need to be guided by the best available literature and techniques of 
the parts of business history concerned with them, nothing general 
can be said. What is at stake are complicated facts whose meaning is 
bound tightly to context and particular cases. 

While puzzles about the identity of investors are therefore 
problems less for the investment theory of political parties than for 
other branches of the social sciences such as business history, the 
same cannot be said about the methodological problems involved in 
inquiries into which parties or policies a firm or a group of investors 
supports at particular moments. In the absence of a clear justification 
for these sorts of claims the investment theory of parties cannot hope 
to flourish. 

Records of campaign contributions by major investors, of course, 
can provide important clues about who supports what. But while 
such evidence often yields important insights, it is most commonly 
marked by distinct limitations. The biggest problem is with the 
fragmentary character of the data for nearly all periods of American 
history. Analysts of campaign contributions are nearly unanimous in 
pointing to its inadequacies (Overacker, 1932; Thayer, 1973). Large 
numbers of pecuniary contributions were understated or never 
recorded at all. Cash paid in the form of excessive consultant, lawyer, 
and other third-party fees is rarely noticed and in-kind contributions 
almost never listed. “Loans” which are never repaid or are granted 
on preferential terms rarely attract notice. Neither do “gifts” to 

Not surprisingly, almost every seriously pursued investigation of 
campaign contributions, from the Hearst-inspired attacks on 
Theodore Roosevelt and E. H. Harriman to the recent inquiries into 
corporate bribery conducted under the auspices of the Securities and 
Exchange Commission, has unearthed unreported contributions of 
astronomical magnitude. And there is reason to think the omissions 
have often followed systematic patterns. In an ingenious statistical 
comparison, Pittman has demonstrated that a series of striking and 
predictable differences exist between the original “public” campaign 
contribution lists of the 1972 Nixon campaign and the secretly 
maintained files that later court cases brought to light (Pittman, 
1977). A good rule of thumb, accordingly, is to treat published 
campaign contributions (even after the recent changes in the law) as 
the tip of an iceberg, and be wary of any analysis that relies only on 

This is less devastating to political analysis than it appears. 
Sometimes a fuller pattern of corporate contributions can be retrieved 
by careful archival work. Other cases can sometimes be clarified by 
thorough analysis of apparent patterns in corporate contributions: 
looking either at a sample of core actors that one has defined on 
other grounds as possessing a strong common interest, or checking 
carefully among the attorneys for major actors. 

The beginning of real wisdom in these matters, however, occurs 
when one reflects that direct cash contributions are probably not the 
most important way in which truly top business figures (“major 
investors”) act politically. Both during elections and between election 
campaigns, their more broadly defined “organizational” intervention 

is probably more critical. As the earlier discussion of free-riders 
suggested, such elite figures function powerfully as sources of 
contacts, as fundraisers (rather than mere contributors) and, 
especially, as sources of legitimation for candidates and positions. In 
particular, as I have sought to document elsewhere, the interaction of 
high business figures and the press has frequently been pivotal for 
American politics (Ferguson, n.d.). Merely for J. P. Morgan or David 
Rockefeller to make known his choice for president or his policy 
views to newsmen is to instantly confer substantial newsworthy 
reality to them—and to contribute an in-kind service whose value 
dwarfs most cash contributions. 

This “organizational” influence is less conveniently available than 
national campaign committee records, but it is not impossible to 
obtain, and it has the virtue of being far more reliable than published 
single-figure dollar totals. While of course anyone can reel off a long 
list of their potential limitations,— private archival sources provide 
unparalleled access to this sort of evidence. If Thomas Lamont of J. 
P. Morgan & Co. in 1932 was writing intimate small-circulation 
letters to other New York bankers in support of incumbent President 
Herbert Hoover, and one can obtain these letters, that should settle 
the question of Lamont’s choice for president, no matter how often 
American historians have asserted he was Franklin D. Roosevelt’s 
friend (Ferguson, 1986, n.d.). Similarly, if the chairman of the 
General Electric Company was actively aiding New York Senator 
Robert Wagner in preparing the National Labor Relations Act, it is a 
fair conclusion that he favored it over alternatives (Ferguson, 1984, 

But published sources contain much more evidence than most 
scholars realize. Newspapers print ads with endorsements; obituaries 
often disclose a remarkable political history; and collating newspaper 
accounts of campaigns and campaign press releases often is 
enormously illuminating. Even biographies, institutional histories, 
and magazine profiles of businessmen sometimes contain important 
facts, while for figures active in the present and recent past, oral 
interviews can be hazarded.— In most cases, if one cannot come up 
with the full roster of a candidate’s supporters, still one can generally 
identify a “core.” When this is examined for internal consistency and 
structure (perhaps in the light of preexisting theory), very striking 
patterns often emerge. 

Political appointments can also furnish important evidence. As 

several recent studies have shown, a systematic examination of these 
can be remarkably revealing.— 

Complicating questions of evidence are instances in which 
industries or firms appear to be operating in both parties. These are 
often cited by analysts who wish to deny that businesses promote 
definite public policies or that they wield their influence to obtain 
these policies, so the logic of the situation is important to understand. 

The first step in a realistic analysis is to focus sharply on the ways 
in which issues figure in political campaigns. Party politics in 
America most commonly displays only loose relations to issues. As a 
consequence, in practice, issue politics in America at a national level 
always implies a focus on a particular candidate. Right here, a fair 
number of cases of business bipartisanship become immediately 

In the nomination stage of election campaigns it is only common 
sense for many firms to float a candidate (or more) in each party. The 
chances of getting a winner are thus much enhanced. Similarly, 
different levels of government and different regions of the country 
may make useful mixed strategies of candidate support by one firm. 
Other forms of bipartisanship are no less intelligible but depend on 
different reasoning. The guiding principle is that selection of political 
parties is merely a special case of rational portfolio choice under 
uncertainty: one holds politicians more or less like stocks. 

A firm cannot predict exactly who will win or know for certain 
exactly what policies will be implemented if a candidate or party is 
victorious. But, as the Vanderlip-Stillman exchange suggests, it has 
some useful knowledge of the candidates and parties. So it has to 
estimate its chances of advancing a particular policy and discount for 
the possibility it will lose. Some industries or firms find themselves 
wanting policies that the other party clearly could never accept. 
Having nothing to gain from bipartisan strategies, these industries (or 
firms) become the “core” of one party, as, for example, textiles, steel, 
and shoes were in the Republican Party after the New Deal because 
of labor policy, and chemicals because of trade (Ferguson, 1984, 
n.d.). Other industries or firms, differently situated, can try out both 
parties. But this is the crucial point: rarely equally. For everyone to 
find it in his or her interest to hold identical portfolios of parties is as 
outlandish as the case of everyone’s attempts to buy and hold one 
stock, and for exactly the same reasons. 

The chance of one candidate’s simultaneously satisfying high- and 

low-tariff advocates, labor-intensive and high technology firms, or 
exporters and importers is zero. And, especially in large firms which 
have resources big enough to affect the outcome, some clarity about 
this can be shown to obtain. 

The underlying dependence of business bipartisanship on an 
incomplete articulation of issues is pointed up by critical elections 
like the one of 1936. That election had been preceded by several in 
which issues had not always been clearly defined. It was thus easy, 
and common, for many (not all) investors with a party identification 
(especially attorneys, whose position in the party depended on party 
regularity) to swallow their disappointment at one or another 
candidate they disapproved of and remain to support him in the 
general election. But the 1936 election showed that, as policy 
divergence between parties grew, the bipartisanship of firms 
disintegrated in a perfectly obvious and—it can be shown— 
predictable fashion (Ferguson, 1984, n.d.). 

Once intensive research has produced data linking as many major 
investors as possible to particular candidates, issues, and parties, the 
focus of the inquiry turns naturally from the facts of “support” (or 
the “support network”) to attempts to explain it. Now, the general 
thrust of the investment theory of parties on this question is 
straightforward: The political investments of major investors are 
governed by the same criteria that all their other investments are. - 
For this essay, where there is not space to consider the many rather 
obvious ways one can modify or qualify this postulate, this should be 
taken to normally imply an attempt to maximize wealth (relative, 
perhaps, to some level of risk) in whatever form existing institutional 
arrangements permit this to be augmented: revenues in a business, 
salaries in a bureaucracy, or whatever.^ Accordingly, the investment 
theory of political parties predicts that the political investments of 
major investors can usually be related directly (if commonly more 
subtly than most “economic” theories of politics suggest) to their 
particular positions in the political economy. 

Now, it should be clear that a general methodological analysis 
cannot hope to specify precisely how one defines the politically 
relevant aspects of these “particular positions in the political 
economy.” Such analyses emerge only from a detailed analysis of 
specific historical periods. 

Nevertheless, it is quite possible to identify a general method for 
handling most of the data that one usually encounters. Essentially a 

graphical analysis of political coalitions in terms of industrial (and, 
where necessary, agricultural) structures, this procedure has the 
happy property of providing a means for displaying the coherence of 
coalitions during a single election. In addition, a simple extension of 
the technique to several elections provides the answer to another of 
the questions raised earlier, viz., how it is possible to demonstrate the 
coherence and stability of entire party systems (as well as, of course, 
their eventual breakdown). 

An application to industrial structures of spatial analysis 
techniques used for many years in many parts of the social sciences, 
this technique is perhaps most conveniently explained by outlining 
the steps one might take once one had finished acquiring information 
on the empirical pattern of “support,” as discussed previously. 

The procedure is straightforward. First one identifies what appears 
to be the major outcomes or issues involved in an election. As I have 
elsewhere observed (Ferguson, 1986)—and it should be obvious 
anyway—the identification of the relevant outcomes requires great 
care. The judgments involved (which may, and indeed commonly 
should, be justified as far as possible by reference to quantitative 
evidence) frequently rely on intelligent aggregation of cases, 
measures, and other particulars. They are therefore normally 
complex and sometimes delicate, making it very easy to overlook 
major policies that the analyst happens not to care about, that 
involve recondite or obscure facts (such as monetary policy), or 
which require reference to so-called nondecisions or subtle policy 
moves disguised as administrative measures.— 

Once a plausible list of outcomes that brought the coalition 
together has been identified, the second and most important step 
becomes obvious. When compared with the objective facts of the 
actual economic structure, the issues define a multidimensional space. 
By simply plotting each major investor’s position in this space, a 
“spatial” profile emerges that displays relationships between 
investors’ policy positions and their economic situation. One can then 
see—sometimes at a glance—whether a logic exists within the 
business structure to a candidate’s support “network” during an 
election or to a whole party system. 

A concrete example (adapted and greatly simplified from an actual 
model conceptualized in an earlier essay) that illustrates the use of 
these techniques to analyze a party system as a whole may be helpful. 
An inquiry into the sources of the monolithic policy cohesion 

exhibited by the Republican Party during most of the “System of 
1896” suggested that a two-dimensional scattergraph of the 
contemporaneous American business structure might be quite 
revealing.— For present purposes let us regard the first dimension as 
referring to the “labor intensity” of an individual firm’s production 
process. The second can then be described as a nationalist- 
internationalist dimension in which free-trading businesses opposed 
tariff-seeking protectionists.— When the nonfinancial sectors of the 
business community are scattergraphed along those dimensions and 
the financial community is then added in,^ it is impossible to miss 
seeing the gigantic—indeed hegemonic—antilabor, intensely 
nationalist bloc of the system of ’96 centered in quadrant 1 of figure 

1 A 

Unfortunately the varying quality and frequent gaps in available 
data require that an extensive commentary accompany all attempts to 
present scattergraphs of actual party systems in American history. So 
neither this nor the next section of the paper can undertake to 
estimate actual models.— These will have to be separately published. 
But even from the example under discussion, the general procedures 
for analyzing stability over time should be clear. While short-run 
issues and emergencies may briefly disrupt long-run politics, as long 
as the economy remains relatively the same, so will the basic 

Center Of 
1896 Bloc 


Wages As A Percentage Of Value Added (“Labor Intensity”) 90 








c c 

>—« <L> 

o •- 


« 00 





FIGURE 1.1. The Industrial Structure of a Party System: An Idealization of the “1896” Case 

But it should also be clear how the very act of plotting a coherent 
party system can uncover the model of its decay (a decline, 
incidentally, in which the generational decline of partisanship among 
the electorate need play no role whatsoever). Over time, and 
especially over a series of booms, cumulative changes in industrial 
structure occur. New fortunes, firms, and industries rise, older ones 
may decline, and any number of related changes begin to occur. As a 
consequence the distribution of major investors within the space 
begins to alter (i.e., the points representing major investors on the 
graph shift position). Without analysis of actual cases, one can only 
speak in the most general terms about the changes that ensue. As the 
sketches in the following sections suggest, what usually occurs first 
are some reshufflings within existing coalitions. Older alliances begin 

to break down, and signs of strain emerge. What happens next 
depends importantly on the overall level of economic activity as well 
as the specific sectoral, firm, and institutional patterns that real 
economies display. In theory waves of rapid growth could simply 
lead to the gradual disintegration of a political coalition. Depending 
on the facts of the case, a new one might arise (as when some new 
bloc gradually forms), or, of course, chaos might follow the 
disintegration of a previously hegemonic bloc. It is also possible that 
two previously warring blocs might merge and competition cease. 

Commonly, however, the transition to a new party system is more 
complicated. As described in another essay (Ferguson, 1984), the 
economic growth that comes with long booms often leads to basic 
changes in an economy’s overall pattern of development. Entire new 
sectors dominated by new elites, for example, may rise up in the 
course of a boom, or secular change may take place in the financial 
system. Such cases often force new issues to the fore and complicate 
the transition to a new party system. 

The passage from one party system to another, in addition, is very 
often catastrophic. As pressures for change build up over a boom, a 
sharp downturn finally arrives. This can, of course, excite the (at that 
moment usually miserable) general population. But if, as occurred in 
every case save that of the New Deal, substantial numbers of people 
are unable to become significant political investors, then the 
character of the transition depends almost entirely on the changing 
alignments of major investors. 

Typically major depressions rapidly reshuffle investors in several 
ways. First, they bring about waves of bankruptcies and (often 
defensive) mergers. If these are sufficiently extensive—as they were, 
for example, in the giant merger wave of the 1890s that literally 
created the System of ’96 Republican bloc,— then the old party 
system may cease to exist. Economic downturns also have other 
effects that may lead to swift reorganization of investor blocs, 
however. Even if there is no general merger wave, depressions 
strengthen the position of the strongest investor groups relative to 
their rivals. As the dominant groups move to capitalize on their 
advantageous positions, very dramatic clashes often occur that may 
involve far-reaching changes in public policy—of the order of the 
New Deal’s Glass-Steagall Act (Ferguson, 1984, n.d.). 

Rapid changes in the world economy may provide impetus for 
other rapid reshufflings. Since many major American downturns are 

merely local manifestations of world economic crises,— the situation 
of American industrialists has sometimes been drastically affected by 
the strategies foreign competitors adopt to cope with their own 
problems. Some industries in the United States, for example, may not 
be able to face heightened international economic competition that 
accompanies a shrinking volume of world trade, or the export drives 
foreign manufacturers mount to make up for declining demand in 
their home markets. So their stances toward tariffs and related issues 
may change abruptly from what they have been all through the 
previous party system. And, as I have described in other works 
(Ferguson, 1980, 1984, n.d.), various pathological (in the sense of 
abnormal and transitory) phenomena that accompany steep 
downturns may also reshuffle older coalitions. Industrialists, for 
example, have on occasion dramatically split with financiers over the 
question of measures to stimulate the economy or whether to remain 
on the gold standard. 

The transition from the Republican-dominated System of 1896 to 
the New Deal was of course affected decisively by the dramatic shift 
in the balance of power between management and labor that 
occurred during the New Deal. But the very clarity and vividness of 
this example—which involved the rapid spread of unionization and 
the mass mobilization of millions of ordinary Americans—draw 
attention to the close links between the analysis of party system 
stability over the long run and the final question posed at the opening 
of this section concerning the significance for an investment theory of 
parties of situations where millions of ordinary investors have in fact 
joined to contest control of the polity by major investors. 

Now, the fundamental factors militating against control of public 
policy by ordinary citizens have already been discussed.— More light, 
in addition, will be shed on these issues in the next section, which 
briefly examines American trends in mass political mobilization. 
Nevertheless, because the question is so fundamental, and because 
even analysts who should know better often write as though they 
believe the only way they can defend the dignity of the victims of 
American history is to make them responsible for its outcomes,— a 
closer look is warranted at the conditions under which one might 
decide that ordinary voters are controlling public policy, and at how 
often they have done so in American history. 

Perhaps the most obvious sign that major investor dominance is 
under challenge is public, visible indications of panic among major 

investors. Perhaps the best-kept secret of the endless discussions of 
community power that have marked recent American political science 
is that it is probably impossible to disguise a condition in which the 
community actually acquires power. At such times—as in the New 
Deal, or the (failed) Populist insurrection—the political atmosphere 
heats up enormously. As whole sections of the population begin 
investing massively in political action, elites become terrified and 
counterorganize on a stupendous scale. The volume—and acrimony 
—of political debate and discussion increase—so much so that the 
echoes reverberate for years afterward. And, invariably, elites openly 
begin discussing antidemocratic policy measures and more than 
usually exalt order and discipline as social goods.— 

Some indicators that major investors in fact dominate 
policymaking are fairly obvious. Officially organized or sanctioned 
violence against large groups of the citizenry probably constitutes one 
telltale sign. While one can imagine situations in which a government 
represses a particular strike or protest demonstration to the cheers of 
the bulk of the electorate, the longer this persists and the broader the 
attacks, the less plausible this possibility becomes. Similarly, 
widespread cases of surveillance by police (abetted perhaps by private 
groups in a patron-client relationship to the gendarmes), the 
disruption of meetings, and formal and informal harassment of 
dissenters (such as their inability to find jobs) are scarcely compatible 
with citizen sovereignty.— 

A close scrutiny of the substance of public policy, of course, should 
in principle disclose the interests it serves. In industrial societies, 
perhaps the single most important and obvious dimension to examine 
in this respect is state policy toward the “secondary” organization of 
the citizenry. By far the most important of such organizations, of 
course, are labor unions. Though most discussions of American 
“democracy” elide the often ugly facts, the truth is that if employers 
are allowed untrammelled rights to destroy organizations created by 
their laborers, then claims about “citizen sovereignty” are merely 
cynical rationalizations for elite investor dominance, whether in 
Poland in the 1980s, Massachusetts in the 1850s, Pennsylvania 
before the New Deal, or much of the South and West today. Mutatis 
mutandis, the same is true of agricultural societies in which the state 
subsidizes organizations designed for large farmers while placing 
hurdles in the way of organizations (including cooperatives and credit 
unions) servicing small farmers, sharecroppers, tenants (urban or 

rural), and the permanently underemployed or poor. 

Other dimensions of public policy are also important, of course. 
Perhaps the most urgently needed piece of research in American 
history is a set of reliable, quantitative estimates of the tax burdens 
borne by segments of the population at different points in time. Short 
of that ideal study, it is vital to attend as best one can to the shifting 
incidence of taxation, for until social services began to grow it may 
well have been the most important single issue in assessing the overall 
balance of power between large and small investors.— 

Social services themselves are, obviously, another excellent 
indicator of how much control ordinary investors are able to exercise 
over public policy. It is, of course, true that demand for these varies 
over time and especially with the level of urbanization and spread of 
wage labor through society. Nevertheless, it is highly doubtful that a 
modest social security program, a minimum wage, savings 
guarantees, small agricultural credit programs, and well-funded relief 
programs during depressions would have been any less popular 
among the citizenry as a whole in 1840 than they were in 1940. 
(Certainly there was plenty of agitation for them in the 1840s.) 

By making rough and, in this paper, necessarily informal estimates 
of the content of state policy on these and perhaps a few other issues 
(such as immigration), real empirical content can be infused into the 
often vacuous debate over who or whose interests historically have 
governed. It is perfectly easy, for example, to imagine a pattern of 
policy results, leadership, and mobilization that would support an 
“electoral sovereignty” model of nineteenth-century American 
politics. For instance, state policy could have promoted organizing 
and political activity among small farmers and labor, shortened the 
length of the working day, taxed the wealthy, and generalized social 
insurance at an early date. Leadership of political parties and 
voluntary organizations could have been virtually monopolized by 
ordinary citizens; and the most affluent Americans could have been 
least involved, active, and interested in the party system—but they 
were not. 

Instead, as the following sketches suggest, not until the New Deal 
did any important segment of the mass population acquire much 
importance as political investors. Before that date, the major 
investors who defined the various American party systems consisted 
almost entirely of businessmen. As a consequence, critical 
realignments that resulted in hegemonic blocs before the New Deal 

marked elections in which a powerful new element within the 
business community ascended to power—in 1860, the railroads; in 
1896, manufacturers; while in the New Deal, the biggest winners 
were not unions but the combination of international oil, investment, 
and commercial banking firms that I have elsewhere termed the 
“multinational bloc” (Ferguson, 1984). By contrast, party systems 
like those of the Federalist era, or the Jacksonian period, during 
which no clear hegemonic element emerged, marked periods of bitter 
competition within rival groups in the business community—in the 
former, between pro-British merchants, planters, and financiers on 
one hand, and pro-French merchants and planters on the other; in the 
latter, between regionally dispersed arrays of merchants, (some) 
planters, and state banks on one side, and most other sectors on the 


Bearing in mind all these methodological considerations, it is possible 
to try briefly to summarize the major investment blocs that have 
constituted successive American party systems. It should of course be 
obvious that a single paper can at best present nothing more than a 
series of highly stylized and tentative sketches. As much a report on 
research in progress as anything else, such sketches necessarily neglect 
all sorts of significant details, and they cannot afford to do more than 
glance at alternative interpretations of the same events.— They serve 
mostly to identify problems and to suggest connections between 
outcomes which initially might appear unrelated. They also provide 
an indication of what traditional electoral-centered accounts of 
power in America have missed. 

A. The First Party System: Federalists vs. Jeffersonian Republicans 

Whether the Federalist-Republican clashes that began shortly after 
the ratification of the Constitution can be described as constituting a 
true “party system” in the conventional sense has sometimes been 
questioned.— But since politics in this period looked extensively like 
a party system—featuring more or less formally organized parties, 
recognized leaders, and substantial issue differences—and sounded 
like one, marked as it often was by bitter clashes and, as figure 1.2 
shows, a steadily rising level of voter participation which peaked 

during the crisis of 1812—the first party system might as well be 
recognized as one. 

But affirming reality is only the first step toward explaining it. 
Once one acknowledges that the first party system was no 
counterfeit, the successive stages of its often puzzling career still 
await explanation. Why did a political coalition fresh from its 
dazzling success in maneuvering the Constitution’s acceptance break 
up so rapidly in the early 1790s? What was the connection between 
the gradual U.S. slide into war with Britain and the soaring rise in 
voter turnout? Perhaps most mysteriously of all, how could the 
intense partisanship of 1812 evaporate within a mere four years? And 
what miracle of political alchemy transformed the Jeffersonian 
Republicans from bitter opponents of Alexander Hamilton’s schemes 
in support of the “Money Power” to ardent champions of tariffs and 
a Bank of the United States after 1816, when the Era of Good Feeling 
and a period of one-party government can be said to have begun? 

The search for a solution to all these puzzles, I think, properly 
begins with an appreciation of the complex and rapidly changing 
nature of the American upper class of this period. As figure 1.2 
suggests, all through the 1790s wealth in the United States remained 
far more equally distributed than it was a generation later. But while 
the social pyramid remained comparatively broad and low all 
through the first American party system, still its upper levels attained 
considerable height—and it was primarily this upper 10 percent to 15 
percent of the population that first created that system and then, after 
the War of 1812, abruptly ended it. 











„ 60 







5 40 



A Massive Increase In The Concentration Of Wealth 
Accompanied The Early 19th Century Rise In 
Voter Turnout 

Top Decile. Total Wealth 
For All Adult Males, 




Turnout For Virginia 
Assembly Elections\ 
(Va. Had Consistently^ 
High Turnout Com- ^ 
pared To Other States) 

Turnout In Salem, 1 
For Local Elections jl 

(Ma. Had /\}' 
Medium-Low ' Ij 
Turnouts Compared 
To Other States) 

' Presidential 

Share Of Nonbusiness Wealth Held By Top 
1%, Brooklyn 

1690 05 1720 35 50 65 80 95 1810 25 40 55 70 85 1900 15 30 45 60 

































FIGURE 1.2. Voting Turnout and the Concentration of Wealth in the Nineteenth Century 

Sources: Presidential turnout (Burnham): colonial turnouts (Dinkin 1977); wealth data 
(Williamson and Lindert, 1980). 

Note: All data are discrete; lines represent conventional interpolations. 

The endless wrangling over the details of Charles Beard’s famous 
analysis of the Constitutional Convention, for example, should not 
be allowed to obscure the critical point: that once the bulk of the 
upper class decided they wanted the Constitution, effective resistance 
was literally beyond the means of the mostly, though not entirely,— 
poor and provincial anti-Federalist opposition. Although, as Main 
and other recent analysts have observed, a majority of the population 
in many states probably opposed the new regime, the resources 
available to the affluent, well-educated, and cosmopolitan merchants, 
planters, large landowners, financiers, and lawyers who led the 
campaign for ratification dwarfed those of their opponents.— 
Especially after they made concessions on the Bill of Rights (which 
the reactionaries at Philadelphia had declined to include), their 
campaign ran roughshod—the words are carefully chosen—over all 
opposition and secured the adoption of the Constitution (Main, 

But almost immediately this first hegemonic bloc of virtually all the 

big investors disintegrated. Backed by a huge interlocking and 
interrelated directorate of merchants, lawyers, financiers, and certain 
landowners who dominated a handful of key financial institutions 
(including Robert Morris and Thomas Willing’s Philadelphia-based 
Bank of North America, the Bank of New York, and the 
Massachusetts Bank), Secretary of the Treasury Alexander Hamilton 
(co-founder of the Bank of New York, who married into one of the 
families that controlled it) put forward his famous fiscal program.— 

Calling for federal government assumption of the foreign debts of 
the Revolution and Confederation, tariffs, federal assumption of state 
debts, the issuance of money, public securities, and a Bank of the 
United States, Hamilton’s program struck directly at the vital 
interests of many planters. Many of the Southern states had already 
paid their debts; now they would be taxed to pay others. The Bank 
was not intended to aid agriculture, only commerce.— In addition, it 
soon became apparent that many prominent Federalists had been 
speculating on a rise in the value of existing securities, betting that 
Hamilton’s program would pass and provide them with massive 
capital gains that the rest of the population would be taxed to pay 

Not surprisingly, therefore, Thomas Jefferson, James Madison, and 
their planter associates almost immediately began mobilizing. Joining 
them in due course were a variety of business groups that resented 
Federalist attempts to limit banking competition by restricting the 
number of bank charters, which at that time had to be individually 
approved by the legislature (Hammond, 1957, pp. 146-47). 
Prominent among these were a bloc of businessmen, financiers, and 
landowners in New York City that included the Clinton family and 
Aaron Burr (who eventually organized the Bank of Manhattan to 
rival the Federalist Bank of New York). 

Polarization increased as Hamilton expanded the scope of his tax 
program. His proposals laid only modest duties on goods imported 
by his merchant constituency. Instead, Hamilton wanted to raise 
much of the money necessary to pay off the government debt by 
taxes on slaves (owned by the planters) and whiskey produced by 
subsistence farmers in the West. 

A widespread “tax revolt” began. Jefferson and other members of 
George Washington’s cabinet without strong ties to the “Money 
Power” (as opponents dubbed the Federalist complex) resigned one 
by one. Aided by Washington’s forcible suppression of the pathetic 

Whiskey Rebellion and later Federalist attacks on important emigrant 
leaders of the opposition, Jefferson’s Republican Party gathered 

Had conflict between the Federalists and Republicans been limited 
to Hamilton’s fiscal program, it is possible that the Federalists might 
have survived in power. Very shortly, however, the Federalist 
investors began to divide sharply over foreign policy. 

Ever since the Revolution, relations between Britain and the United 
States had been poor. British regulations restricted U.S. trade with 
Britain and its dependencies; ships of the British navy frequently 
seized U.S. vessels, and British forts remained in the American 
Northwest, where they were frequently accused of stirring up the 
Indians to attack.— 

Planter spokesmen such as Edmund Randolph, who succeeded 
Jefferson as secretary of state, favored harsh measures to deal with 
the British. Federalist financiers and merchants, dependent on Britain 
for trade and, more importantly, credit, strongly opposed this. After 
a series of intrigues involving both Britain and France, New York 
merchant John Jay negotiated a treaty with the British. Because it 
sacrificed almost all other American interests, including that of the 
planters (whose old debts to the British the treaty reconfirmed) to the 
merchants’ desire for good relations with Britain, the treaty became 
very controversial. 

Though the Federalists weathered the storm over the Jay Treaty, 
pro-French elements in the mercantile community, such as 
Philadelphia merchant banker Stephen Girard (whose attorney, 
Alexander J. Dallas, was closely associated with Albert Gallatin, 
Jefferson’s chief financial spokesman),— began coming over to the 
party of “agrarian democracy.” 

Though this paper cannot afford to trace each quarrel in detail, 
subsequent battles between the Republicans and the Federalists 
virtually all reflect disputes along these same two dimensions of 
financial/fiscal policy and foreign relations. 

The difference between earlier and later outcomes, which the 
Jeffersonians largely controlled, however, reflects the increasing 
strength of the anti-British party. Since the Revolution, American 
trade had been shifting away from Britain to other parts of Europe, 
the West Indies, Russia, and the Orient.— Over time, this 
significantly reduced the number of merchants dependent on the 
British. Jefferson’s election as president in 1800, for example, hinged 

importantly on prodigious organizing efforts by the Bank of 
Manhattan (Hammond, 1957, p. 160). During the Napoleonic Wars 
pro-French merchants such as Robert Smith of Baltimore (Jefferson’s 
secretary of the navy) and the Crowninshield and Story families of 
Salem, Massachusetts, supported Jefferson (Burch, 1981a, pp. 86, 90, 
and 110). No less importantly, expansion into the West created a 
new class of merchants, such as legendary fur trader John Jacob 
Astor (a close friend and supporter of Gallatin, after Gallatin became 
Jefferson’s secretary of the treasury) with a strong interest in ejecting 
British rivals from the West. Many planters and large landowners 
who were openly planning to seize Florida from Spain, and drive the 
British from both the Midwest and Canada, also supported this 
goal. - 

The mushrooming sentiment for war in the West alarmed the still 
largely proBritish elites of New England. With the pro-war party 
growing vigorously, increasingly frantic Federalists coalesced behind 
a peace-oriented ex-Republican from New York City. The vigorous 
campaign and high stakes brought out the enormous turnout that 
figure 1.2 shows.— 

With the end of the war, and the temporary removal of the “British 
question” from the public agenda, the mounting elite strength within 
the party of “agrarian equality” made it perfectly natural that the 
Republicans should adopt “Federalist” policy measures. 

Back in his first term, Jefferson had deliberately encouraged pro- 
French merchants like Salem’s Joseph Story (whom Jefferson 
appointed to the Supreme Court) to found Republican banks. - 
These disproportionately Republican state banks had flourished in 
the decade before the charter of the First (Federalist) Bank of the 
United States came up for revision in 1811. Joined by Girard (who 
wanted to set up his own national bank), Astor, and others, these 
state banks blocked renewal of the first Bank’s charter. But 
subsequently Astor, Girard, and other businessmen purchased large 
amounts of government bonds to help finance the War of 1812. (It 
was, after all, their war.) When the bonds began dropping in value 
after the war, these major investors moved at once to secure their 
investments by establishing a bank that would support a market for 
the bonds.— 

Having taken over the centerpiece of the old Federalist program, 
the Republicans also realized another Hamiltonian goal: a protective 

tariff. As soon as the war ended, British industrialists moved to 
recapture their former position in the American market. Hoping to 
destroy the manufacturing capacity that the war and British blockade 
had stimulated in the United States, the British began dumping goods 
in American ports. Virtually all sectors of the business community 
rose in angry protest. Even Southerners, who may have harbored 
hopes for industrialization themselves (at this moment when cotton’s 
commercial success was still not assured), backed tariffs.— With 
almost no major issues now dividing American elites, party 
competition (and voting turnout) virtually disappeared. President 
James Monroe traveled to Boston and made gestures of reconciliation 
toward Federalist elites, who had only recently discussed secession at 
the Hartford Convention in 1814. An Era of Good Feeling 
commenced. Quite like Mexican elites a hundred years later, 
American investors for a time enjoyed the luxury of ruling an 
essentially one-party state under the banner of revolutionary 

B. The Jacksonian Tarty System 

As though to underscore the point that elite competition, rather then 
swelling mass political sentiments, would provide the driving force in 
nineteenth-century American politics, the Era of Good Feeling had 
just barely taken hold when the devastating depression of 1819 burst 
upon the scene. Though reliable statistics are lacking, there is little 
doubt that what could be identified as America’s first modern 
business depression wreaked widespread havoc. Though the 
predominantly agricultural character of the economy perhaps 
mitigated the worst consequences, unemployment soared, perhaps 
topping 20 percent in some cities. Both business and farm 
bankruptcies soared, and demand for relief triggered riots and 
demonstrations all over the country.— 

All the tumult, however, created barely a ripple in the placid 
waters of American national politics. While few members of the 
American upper class probably relished the Era of Good Feeling quite 
as much as President Monroe (who, as long as he sat in the White 
House, enjoyed loans from Astor at concessionary rates),— none even 
bothered to contest the president’s reelection in 1820. Instead they 
organized at the local level to oppose public relief and attempted to 
hold down private relief disbursements—when they were made at all 

—to well under 1 percent of the gross national product (GNP). 

Cumulative economic changes during the 1820s, however, 
eventually accomplished what all the human misery of the panic of 
1819 could not. The headlong expansion of the American national 
economy began redividing and reordering the business community. 
Whole new blocs of investors came into being. In this early stage of 
industrialization, major infrastructural projects could still be 
mounted by states and localities. Accordingly many big investors 
concentrated their efforts there. Turnout in local races often rose, 
party machinery developed, and any number of campaign techniques 
entered increasingly into general use.— 

Over time, however, the process of capitalist development posed 
issues that could only be settled at the national level. For example, 
industrialization stimulated tariff agitation all through the 1820s. 
Organizing nationwide, industrialists perfected the technique (which 
the parties later took over) of turning out their work force for mass 
meetings around demands that preeminently benefited someone 
else.— They also subsidized scholars to promote protectionism 
(including Friedrich List, whose Nationalokonomie was perhaps the 
one foreign import appreciated by the Pennsylvania iron 
manufacturers who arranged his long visit here). 

As revenues from tariffs piled up, what should be done with the 
money naturally became an issue. Several different proposals found 
support. Some suggested that all the money be applied to the national 
debt, others proposed that it be returned to the states, while Henry 
Clay put forward his famous program of internal improvements. A 
generally rising level of agricultural prices also stimulated demand for 
Western lands. Since the federal government controlled these, how 
they should be developed automatically became a national issue. 

Perhaps the most important issues which came inevitably onto the 
political agenda during this period concerned the Bank of the United 
States and the question of territorial expansion. Both issues could be 
resolved only at the national level, and both attracted major blocs of 
investors. The basic dimensions of the Bank question were brilliantly 
spelled out a generation ago by Bray Hammond, and there is little to 
add to his treatment.— Throughout the 1820s, the Bank of the 
United States restrained (rival) state and private banks from 
circulating un or thinly backed bank notes by its ability to collect and 
then present large amounts of notes for redemption into hard money. 
With state banks proliferating at a prodigious rate, a head-on 

collision between the regulator and the involuntarily regulated 
became inevitable. Because Philadelphia capitalists dominated the 
Bank, New York and other city bankers and capitalists took the lead 
in the campaign to destroy it. Though Hammond did not mention it, 
it is possible that railroad rivalries between Philadelphia, Baltimore, 
New York, and other cities also played a role.— 

Since several well-known Jacksonian scholars have flatly asserted 
the contrary, it is probably worth observing that the anti-Bank forces 
went about their business about as straightforwardly as any group 
ever has in American politics. Andrew Jackson’s cabinet and advisers 
included many state bankers, who did not conceal their desire to 
smash the Bank (notably Attorney General Roger Taney, who not 
only served as a director of a state bank whose president hated the 
Bank, but was also a part-time legal counsel to the Baltimore and 
Ohio Railroad, which stood to gain from the injury the Bank’s 
destruction would inflict on Philadelphia’s capacity to raise railroad 
finances). The ranks of the Albany Regency, the political machine 
perfected by Martin Van Buren, a close associate of Jackson, included 
many important bankers, from both New York City and upstate.— 
Subsequent battles over banking and finance legislation followed a 
similar pattern. The Loco Focos, whom two generations of historians 
have treated as virtual Jacobins because of their agitation against 
financiers, have recently been demonstrated to have won support 
from literally hundreds of New York City bankers and merchants, 
whose plans for “free banking” and other reforms could plausibly be 
passed off as “antimonopoly” measures. — Van Buren’s controversial 
plan for an Independent Treasury arose in response to demands from 
these quarters. No less than Churchill Cambreleng, a longtime 
associate of John Jacob Astor, sometime railroad official and 
founding director of the Farmers Loan and Trust Co. (of New York 
City), pushed the plan on Van Buren, whose former law partner 
happened also to be a major (New York City) bank director. 

The other outstanding national issue during this period concerned 
the rate and timing of territorial expansion into what almost 
everyone referred to as the “inland empire.” For decades many 
important American investors had dreamed of incorporating all or 
parts of Mexico and the Far West (including Oregon) and Canada 
into the United States. In the 1820s, Monroe, John Quincy Adams, 
Clay, and other business leaders encouraged Latin American 

countries to rebel, believing that this would remove European 
influence from the hemisphere and open these countries to U.S. trade. 

As transportation improved, and profits from Southern cotton 
production soared, the question of territorial aggrandizement came 
increasingly to the fore. By 1828 proposals for the annexation of 
Texas (where many American businessmen from Boston, New York, 
Philadelphia, and the South were heavily invested, and where Sam 
Houston migrated after helping to run Jackson’s campaign) had 
triggered a growing national debate. Involved were many issues—the 
balance between free and slave states within the Union, the risks of 
war with Mexico and Britain, a preference by some blocs in the 
United States for Oregon or California or Canada instead, etc. 

Space limitations make it impossible to do more than trace the 
barest outlines of the ensuing controversies. But the broad outlines of 
the process which revived national party competition are clear 

Throughout the 1830s, issues involving the Bank, tariffs, and 
expansion became increasingly urgent. In rough proportion to the 
rising stakes followed major investor interest. Copying the political 
methods for recruiting turnout pioneered by the Albany Regency, 
more and more blocs of investors joined battle. A process of 
polarization ensued. With controversy increasing over the tariff and 
nullifications, Jackson destroyed the Bank. Almost immediately party 
alignments began to crystallize. Party cohesion in Congress leaped up 
and rival party identities became increasingly firm.— 

The continuation of Jackson’s bank policies under Van Buren 
sealed this process. The Democrats tended to oppose a strong federal 
role on everything except expansion: they opposed the tariff (after 
Jackson), the Bank, and extensive federal expenditures for anything 
except harbors. They favored vigorous expansion, especially toward 
Texas and Mexico (where conflict with Britain was less likely) and, 
of course, opposed efforts to regulate slavery. This program directly 
advanced the interests of their core constituencies: port city 
(especially New York City) bankers who financed trade and 
depended on British financing; many merchants (who controlled 
many of the largest fortunes in the country in this period); many 
railroads (which favored free trade and wished to import iron rails 
from Britain, and whose most successful units, such as Democrat 
Erastus Coming’s New York Central Railroad, opposed federal aid 
to other transportation companies); expansion-minded planters (such 

as Robert Walker, treasury secretary under James Polk, whose heavy 
investments in Texas land and cotton made him the natural leader of 
the pro-Mexican War faction in the Democratic Party) [Burch, 
1981a, p. 190]; plus farmers who favored trade agreements with 
European countries to permit their grain to enter those markets. 

By contrast the Whigs emerged quickly as the party championing a 
strong federal role. While the rapid expansion of railroads gradually 
limited enthusiasm for tariffs even among the Whigs (since in the 
short run it reduced the capital going into manufacturing and created 
positive incentives to expand trade), the party did always stand for 
some protection; it also favored the Bank (until the spread of state 
banks rendered the issue moot) and more internal improvements and 
steamship subsidies. Many Whigs also tended to be less liberal in the 
terms they favored for the sale of public land. Though Whigs also 
favored expansion, they went about it more cautiously. Unlike the 
Democrats, they did not vigorously advance the Monroe Doctrine in 
this period, and when offered the chance most of the party tried to 
compromise over both Texas and Oregon. Their elite constituencies, 
of course, differed from the Democrats’: the relatively small (except 
for textiles and iron) manufacturers; a substantial number of 
merchants and bankers oriented toward the home market or invested 
in manufacturing; many railroads, including the Pennsylvania 
Railroad (Sobel, 1977, p. 39) (which often did not support a tariff); 
many (but far from all) land speculators; some planters whose 
interests and identities have been extensively debated (Frescia, 1982, 
pp. 109 ff.), but who certainly included champions of the Bank; and 
overseas traders and fishermen, whose desire for California harbors 
led them to downgrade Texas, the top imperial priority of many 
planters, and who vigorously promoted Whig overtures to Japan and 

But while merchants, planters, railroad men, and other major 
investors often found their investments in politics paid off 
handsomely, mass voters rarely did. 

Bankruptcy legislation that reduced the chances that heavily 
indebted merchants and industrialists would languish in prison for 
nonpayment of debts undoubtedly aided ordinary Americans. And a 
more substantial part of the population doubtless derived some profit 
from all the canals, turnpikes, public schools, and other 
infrastructures built at least partly at their expense during this period. 
But the increasingly meaningless ritual “Repulicanism” that marked 

festivals and public occasions in this period marked the limits of 
official concern for the vital material interests of the bulk of society. 

For example, though precise figures do not exist, the party system 
that witnessed the sharpest overall increase in both wealth and 
income inequality in American history (figure_J^2) probably also saw 
the largest proportion of ordinary people left to starve, beg, or steal 
during severe economic downturns. Virtually without exception, 
proposals for laws to shorten the length of the working day (to a 
mere ten hours) fell on deaf ears. Neither agricultural wage earners 
nor owner-occupied small farms received any significant assistance 
from public policy. Disability compensation (which would have 
benefited farmers no less than workers) or unemployment insurance 
was always rebuffed. Minimum-wage legislation was debated but 
never passed. Jackson himself became the first U.S. president to send 
troops to break a strike, while all levels of government largely 
declined to interfere with employers’ “rights” to dismiss, spy upon, 
or blacklist any worker they chose. Rights for women (who had been 
disenfranchised in all states since the turn of the century)— were a 
cause of an unpopular minority, while the fortunes of blacks in this 
period need no comment.— 

The rising voter turnout that marked the period is perhaps better 
analyzed as an effect of the high elite investment in new, cheaper 
technology of voter mobilization and as a sign of elite confidence that 
additional unorganized voters were incapable of posing severe threats 
than in terms of increases in the abilities of ordinary people to 
control the state. Though the unit costs of the means of popular 
mobilization were probably lower in this period than in any since, 
entry barriers remained prohibitively high, especially at the national 
level. Then, as today, most voters could not afford to take extensive 
time off from work to campaign and agitate. In addition, most lacked 
more than a rudimentary education; somewhere between 10 percent 
and 20 percent were illiterate, while many more were not fluent in 
English. While formal barriers to suffrage mostly fell away during 
this period, financial barriers did not—indeed, overall they doubtless 
increased. In a subtle touch insufficiently appreciated by later 
analysts, members of Congress received no regular salaries until 
1856. While printing costs fell and newspapers were probably easier 
to start than ever since, the incomes of ordinary people were not 
sufficient to sustain papers reflecting their interests: out of more than 
1,000 papers the Census estimated existed in America in the 1830s, 

not more than perhaps 50 were prolabor—and most of these folded 
in the panic of 1837.— 

Even more important than these “passive” entry barriers were the 
active ones. While political machines of course had to deliver some 
benefits to voters, all the relief, Christmas turkeys, citizenship papers, 
and whatever else later analysts have celebrated them for probably 
amounted to less than 1 percent of GNP. In addition, the growth of 
the political machine destroyed all chances ordinary citizens had for 
exercising power. As social organizations, political machines were 
critically dependent on money—enormous streams of it. Without the 
cash, reason, discussion, or persuasion availed one nothing. Machines 
also made it easy to isolate segments of the electorate and to play 
endless games to divide and rule.— 

The wealthy dominated most other voluntary organizations as 
well. Conspicuous in this regard were the churches. Gramsci once 
observed that in America there were many sects but only two parties 
(Gramsci, 1971, pp. 20-21). But, while entry barriers for churches 
were lower than for the major parties, the major denominations 
offered little beyond alms to the lower classes—indeed, they became 
the chief source of movements to remake the American working class 
from above, in the guise of “benevolence.” In a seminal study, Paul 
Johnson has documented the overwhelming importance of 
manufacturers in launching the great revivals and temperance 
crusades of the 1830s—the prototype for the reform movements that 
convulsed middle-class life in this period (Johnson, 1979). Similarly, 
other studies have shown the impact of changing social class in 
nurturing the schisms and breakaway groups that have proliferated 
ever since (Singleton, 1975). 

The only forms of social organization that might have afforded the 
work force an independent capacity to act in politics were denied 
them almost completely. While business elites almost always 
protected (and often encouraged) immigrant churches, they spared no 
expense to destroy unions—to such an extent that a smaller 
percentage of workers belonged to unions at the end of the period 
than at its beginning (Lebergott, 1972, p. 220). Though I have not 
been able to find any systematic studies of entry barriers within farm 
organizations in this period, there is little doubt that the network of 
“scientific” farm groups that sprang up after 1820 was controlled by 
the larger farmers, whose businesses were the only ones large enough 
to justify the expense of dues, travel, and meetings, and occasional 

subsidies for organizational experiments.— One might therefore 
suspect that in the case of single-family farmers, unlike that of labor, 
the adverse microeconomics of voter control, rather than more overt 
repression, defeated agrarian democracy. 

C. The Civil War Tarty System 

For years the epic highlight of many survey sources in American 
history and politics has been a detailed analysis of the ever-widening 
gulf that grew between the North and South in the years before the 
Civil War. By now the stars of this drama are so well known they 
scarcely need any introduction: tariff-seeking manufacturers in the 
North; Northern farmers and laborers who feared competition from 
slavery and wanted access to free land either for themselves or their 
children or because they hoped Western settlement would pull up 
wages in the East; and Southern planters who sharply opposed tariffs 
and were increasingly convinced that slavery had to expand or die. - 

In recent years, however, this classic formulation of the Progressive 
interpretation of history has come under sharp attack. The 
importance attached to the tariff, for example, has been sharply 
questioned. In the early 1960s, several New Economic Historians 
argued that the South could actually have benefited from rises in 
tariffs. While this result now looks even more flimsy than some of the 
early quantitative work on railroads and the economics of slavery, 
the best recent assessments of how much the South lost from tariffs 
make it difficult to believe that the sums were worth secession in 

In addition, several studies have shown that the cotton textile 
industry, one of the largest and best-organized manufacturing interest 
groups, and one which presumably would have benefited from the 
Civil War tariffs, staunchly opposed Abraham Lincoln in 1860 out of 
anxiety for its supply of cotton (Foner, 1941; O’Connor, 1968). 

Depending on their exact form, parts of the land argument also are 
shaky. Cotton planters worried about running out of land could 
always have developed some of the fields they later planted within 
the South after the Civil War—an area twice as great as in 1860. 
Older arguments that cotton destroyed the soil and thereby forced 
expansion are simply wrong: planters headed West to take advantage 
of much higher yields, not because their own lands were wrecked. 
Nor is it obvious that increasing cotton (or wheat) acreage would 

have helped farmers as a group in either the North or the South. As 
Lee and Passell have observed, assuming that demand did not change, 
prices of crops would drop, lowering an individual farmer’s revenues 
from the same output (Lee and Passell, 1979, pp. 212-13). 

Not surprisingly, therefore, recent treatments of the political 
economy of the Civil War increasingly resemble movies about the 
Titanic in which the iceberg melts away before it can come on 
camera. Several highly sophisticated analysts have simply thrown up 
their hands, while others have resorted to increasingly improbable 
devices, including suggestions that thousands of Southern planters 
were literally paranoid.— 

From the perspective of the investment theory of parties, however, 
the giant forces that first polarized the nation and then broke it apart 
are easily identified. 

Consider first the situation of major Southern investors. While Lee, 
Passell, and other New Economic Historians have greatly advanced 
the argument by bringing out more clearly the main economic issues 
in the dispute over expansion of slavery into the territories, they slip 
past the historically decisive point. Within any likely range of price 
declines, it simply does not matter if opening up new cotton lands 
might have slightly reduced the world price for cotton, or lowered the 
productivity of cotton acreage in general. These are aggregate effects 
spread out among all cotton growers. As the investment theory of 
parties suggests, what usually matters most in historical change is the 
position of the major investors. And here the situation is clear. 

As the earlier planter invasions of Alabama, Louisiana, Texas, and 
Missouri illustrated, major cotton growers were highly mobile. They 
(or their agents and sons) moved rapidly to take advantages of any 
rich growing areas that opened up. Walling off these slaveholders 
from the territories by prohibiting slavery there would have reduced 
the rate of return on their investments, almost certainly to a 
significant degree. That less mobile or smaller groups would benefit if 
the major investors sacrificed profits and stayed home is irrelevant. 
One might as well expect major oil companies not to pump oil for 
the sake of the independents, or affluent farmers not to apply 
machinery and fertilizer, to increase everyone else’s returns. 

It could be replied that the territories opening up in the 1850s 
scarcely compared to Texas and Louisiana, and so could hardly have 
seemed widely attractive. But many reasons exist for thinking this 
was not the case. On and off the Senate floor in the period just before 

the Civil War, planters repeatedly demanded the right normally 
accorded capital in America to seek the highest possible rate of return 
by going anywhere it pleased. — In addition, both their words and 
some actions suggest that leading Southerners were making or 
projecting investments in southern California (then a very shaky free 
state), New Mexico, and perhaps Nevada—all areas whose status as 
slave or free remained unsettled in the 1850s.— 

It is also doubtful if the more recent literature has been sufficiently 
sensitive to the impact the admission of increasing numbers of free 
states to the Union was making on the Southern position within the 
federal government. Many newer accounts pause only to nod at the 
traditional arguments about Southern fears of permanent minority 
status, especially in the Senate. 

But this skepticism is unwarranted. One of the few real battles in 
the Era of Good Feeling came over the admission of Missouri into the 
Union—and the solution to the problem, involving the carefully 
paired admission of Missouri as a slave state and Maine as a free 
state, underscored the importance accorded regional balance. 

Similarly, the annexation of Texas was delayed for years while 
debates raged over its impact on sectional power. Considering the 
heat these early fights generated, it is difficult to see why anyone 
would now doubt that the new conquests of the 1840s would 
inevitably raise the issue to a new level of interest, or that as 
Southerners watched California, Oregon, and other states enter the 
Union as free states, they would become increasingly fearful. 
Especially after the Kansas-Nebraska controversy undermined the 
painfully hammered-out Compromise of 1850, it is easy to see why 
Southerners believed that the loss of Kansas not only meant 
abandoning all hope for additional slave states in the Southwest but 
also threatened the status of vulnerable slave states like Missouri.— 

A succession of Caribbean adventures in the 1850s showed just 
how alarmed Southern elites were becoming, as well as how the issue 
of control of the government was now transforming expansion from 
a unifying theme in the 1840s to a cause of breakdown in the 1850s. 
Planters and businessmen from New Orleans, a major center of 
agitation during the Texas controversy, launched an abortive attack 
on Cuba in 1851. Several groups of investors, led by one William 
Walker, organized ventures aimed at other parts of Central America 
in the mid-1850s.— 

To dismiss these cases as essentially actions of private businessmen 
misses all the vital points. Walker’s actions were widely hailed in the 
South. Because they promised control of territory that could later be 
brought into the United States, these ventures found wide support not 
only there, but in parts of the Southern-dominated Buchanan 
administration. Finally, as it became obvious that Northern Whigs 
and perhaps the Democrats were not about to support an attack on 
Cuba that the British (major investors in many Northern enterprises 
and the dominant power in the world economy) opposed, the 
Southern champions of expansion who had once opposed John C. 
Calhoun’s increasingly strident attacks on the North now had no 
reason not to join him.— 

Any remaining doubts about why Southerners became increasingly, 
and rationally, anxious should be stilled when the situation of major 
Northern investors in the later stages of the Jacksonian Party System 
is clarified. 

As the New Economic History analysis misspecified the problems 
affecting the South, so it has failed to focus sharply enough on the 
critical power blocs in the North. That opening more lands along the 
Northern frontier (which at that time included parts of Indiana, 
Ohio, Michigan, and Illinois, as well as Wisconsin, Iowa, and 
Minnesota)— might lead to lower world prices for wheat or, perhaps, 
corn scarcely mattered to the investors chiefly responsible for 
promoting growth in these regions. While such considerations might 
eventually trouble farmers (though not if they believed that demand 
for their product was elastic or they sought a place for their children), 
and workers (who probably would still have preferred farms to 
factories), as well as later historians and social scientists convinced 
that it was these groups that provided the backbone of the Free Soil 
parties, major investors were certainly not trying to get rich by 
buying 160-acre farms. 

Their efforts, by contrast, were directed at securing capital gains, 
for which “development” was essential. Most important, and 
fatefully, however, they were investing in railroads. Now, had they 
been differently circumstanced, it is exceedingly doubtful that the 
Eastern merchants, financiers, industrialists, and lawyers (such as the 
Forbes family of Boston, or the legendary “Associates” of the same 
city) who dominated major American railroads would have scrupled 
at carrying slave-produced cotton any more than their grandfathers 
had worried as their ships carried slaves between Africa and the 

United States. 

In the world of the 1850s, however, cotton expansion could at best 
have helped a tiny minority of these major investors. Railroad growth 
and profits in states like Indiana, Ohio, Illinois, and Wisconsin 
depended on the expansion of family farms in corn, wheat, and 
related products (plus, of course, such infant or locally based 
industries as could survive). Even if the railroads hoped to postpone 
conflict, there was no chance the settlers they were feverishly 
recruiting (who certainly feared slave labor) would sit still. 

The rapidly developing discussions about a transcontinental 
railroad lent additional urgency to the debate over national 
development. A sugarplum that danced in the visions of many major 
investment groups in both the North and the South in the 1850s, this 
venture absolutely required government assistance if it were to be 
feasible. And here was an unpleasant dilemma. Given the enormous 
expense, it was initially possible to build only one. No one had to be 
a New Economic Historian to see that the location of that one line 
would thereby become a major determinant of the whole course of 
national development, and thereby the balance of power between 
North and South. Not surprisingly, therefore, investors proposing to 
begin construction from various cites—Chicago, St. Louis, New 
Orleans—maneuvered all through the decade, and, no less 
unsurprisingly, essentially checkmated each other in the 1850s.— 

The stupendous scale of railroads compared to all other enterprises 
of the period is difficult to imagine today. America’s first true “big 
business” dwarfed every other institution in society in the 1850s. 
(One recent analysis has observed, for example, that as late as the 
early 1880s Carnegie Steel, a leading manufacturing corporation, was 
still capitalized at only $5 million, while at least 41 railroads had 
capital values of $15 million or more [Burch, 1981b, p. 16].) 

As a consequence, the Western-oriented railroads would by 
themselves probably have sufficed to force the issue of North against 
South. Once the issue began to be joined, however, other investor 
interests could hardly afford to sit back passively. 

Even textile manufacturers for example, whose attachment to 
“cotton” as opposed to “conscience” Whiggery is correctly observed 
by the studies cited earlier, probably could not afford to let the South 
expand at the pace Southerners wanted. If textile magnates like the 
Lawrences of Boston tried to prevent war at the last moment by 
organizing the Constitutional Union Party in the 1860 election, they 

still had to make certain that Southern expansion into Cuba or the 
West did not eventually render their tariff-protected manufacturing 
investments as worthless as their heavy contributions to William 
Henry Harrison (who died in office holding an interest-free loan from 
Abbot Lawrence before he could act on either the tariff or the Bank) 
(Burch, 1981a, p. 218, n. 26). 

With partial exceptions among textile manufacturers, merchants, 
and financiers in New York, Cincinnati, and other commercial 
centers who were interested in trade with the South, leading figures in 
every sector of the Northern business community played some role in 
the abolitionist campaign of the 1850s, and indeed statistical studies 
have demonstrated that they were far overrepresented among that 
campaign’s leaders.— 

Illinois Central Railroad attorney (and U.S. Senator) Stephen 
Douglas, for example, destroyed the Compromise of 1850 by 
advancing a plan for the settlement of Kansas and Nebraska that was 
a cover for a transcontinental railroad (Potter, 1976, pp. 145-76). 
When “bleeding Kansas” began hemorrhaging, textile king Amos 
Lawrence (who clearly tried to restrain the group to nonviolent 
efforts) joined many merchants, lawyers, and industrialists to back 
the network of Kansas Aid Societies that sprang up to funnel men 
and supplies to Free Soilers. Contributing money, time, and his 
almost mythic name, Lawrence helped hammer out the plans for a 
land company that offered shares to literally thousands of clergy in 
the New England and the mid-Atlantic states and that eventually had 
large impact on public opinion (Harlow, 1935). 

Finally, transcontinental railroad promoter Samuel Ruggles (a New 
York merchant and leader of the short-lived American Party), 
William B. Ogden (a major developer of Chicago and agent for many 
Eastern capitalists), and superlawyer William Seward (a leading 
abolitionist, and member of a law firm that is today Cravath, Swaine 
and Moore, which at that time represented Wells Fargo and many 
other leading Western interests) all helped build the demand for a 
Northern-based line that eventually achieved expression in the newly 
formed Republican Party (Russel, 1948, passim; Burch, 1981b, pp. 
19-21; Boorstin, 1969). 

The Whig Party had largely been built around the twin issues of 
the Bank and the tariff. A series of booms in the late 1840s and early 
1850s, however, undermined the constituency for both these issues 
and led to the disintegration of the party. Headlong internal 

commercial expansion and the spread of railroads both reduced 
pressures for tariffs—in part because they created interests oriented 
toward the moving (rather than the production) of goods, but also 
because many railroads wanted to import superior British rails for 
their own tracks. In addition, the rapid expansion of state and private 
banks further multiplied the natural enemies of a national bank, 
while privately developed schemes for guaranteeing bank soundness, 
such as Boston’s Suffolk system for state-run bank examinations, 
partially satisfied backers of a “sound” money (Hammond, 1957, 
Chap. 17). 

As the Whigs fragmented, the pieces of the old party looked 
around for new coalitions. For a few years in the early 1850s, when 
very high immigration rates created fertile ground for nationalist 
themes, various factions experimented with all sorts of appeals. 

When the panic of 1857 arrived, bringing with it a wave of 
religious revivals, smashed unions, and, as always, thousands of 
starving unemployed left without relief by “their” political parties 
(Rezeck, 1942), the Jacksonian System was close to collapse. 
Prompted by Southerners within the party and by some New York 
businessmen fearful for their city’s trade with the South, President 
James Buchanan vetoed homestead laws and steamship subsidies. He 
also lowered tariffs and halted all aid to railroads (Polakoff, 1981, p. 

Under this dramatic stimulus a new historical bloc now began 
coming together. While almost none sought war, legions of Northern 
businessmen grew increasingly impatient with the developing 
national stalemate. In the early 1850s, railroad titan John Murray 
Forbes, the leader of the so-called Forbes group of (mostly Western- 
oriented) railroads, and his lieutenant James Joy, president of the 
Michigan Central Railroad (in which the Forbes group held a 
dominant position) had strongly promoted the short-lived Free Soil 
Party.— Subsequently, Joy, while working briefly for the Illinois 
Central (which was then controlled from New York) engaged 
Abraham Lincoln as an attorney. Lincoln continued to work 
intermittently for the Illinois line after Joy departed. He did not, 
however, become the favorite candidate of the railroad, which 
backed Stephen Douglas in the famous Senate race of 1858.— 

What happened thereafter is complex and, despite all the attention 
the period has received from historians, not entirely clear in all 

Still hoping to avoid war, many Northern businessmen 
dramatically increased pressure on the South by fanning abolitionist 
flames. Emulating earlier business support for the Kansas aid 
movement, Forbes and other top business figures contributed money 
to John Brown, the noted abolitionist.— The Forbes group, which 
operated a string of Western railroads that eventually grew into the 
famous Santa Fe line, seems also to have supported Charles 

As businessmen all over the country began uncoordinated, 
decentralized searches for a presidential candidate for the 1860 
election, the panic of 1857 hit. Some railroads folded. Others, 
including several controlled by Forbes, and the Illinois Central itself, 
were hurt badly and barely escaped bankruptcy. 

While many details remain obscure, it is clear that these 
developments enormously strengthened radical sentiments within the 
business community. Among the directors of the Illinois Central, for 
example, anti-Fincoln sentiment seems to have abated,-— while 
elsewhere demand for more vigorous action mounted. By the time 
former Massachusetts Republican Governor Nathaniel Banks had 
become head of the Illinois Central, Forbes, Joy, and company were 
all backing Fincoln as the Republican nominee.— So were too many 
other railroad men to mention, including many with ties to the 
earliest stages of Fincoln’s candidacy (Burch, 1981b, pp. 18-19). 
Joining them were a host of other major business figures, including 
Ogden, the leader of the Chicago business community (which stood 
to profit enormously from Northern transcontinental lines and the 
newly laid railroad connections to the East rather than South) and an 
associate of many powerful Eastern railroad interests;— Ohio 
Publisher Henry Cooke (who came bearing campaign contributions 
from his soon-to-become famous brother in the banking business, 
Jay); Cooke’s friend, Cincinnati merchant and abolitionist leader 
Salmon Chase; and Western Union’s Ezra Cornell. - Businessmen 
demanding both banking reform (which was widely blamed for the 
panic) and tariffs, notably Pennsylvania iron manufacturers led by 
Simon Cameron, all climbed aboard.— 

As the Southern states seceded and the Civil War began, the 
legislative logjam gradually broke up. Tariffs soared, railroad grants 
proliferated, the Homestead Act sailed through, national banking 
legislation that chartered a whole new crop of pro-union financiers 

passed, and Jay Cooke and other financiers did a splendid business in 
government bonds.— 

If the investment theory of political parties accounts well for the 
timing and policies of the hegemonic bloc that dominated the Civil 
War System, it also makes it very clear why that system’s unity could 
not last and why a return to two-party competition was inevitable. 
Though space limitations make it impossible to offer more than the 
briefest outline, this process is so much less well understood than the 
dramatic events of the late 1850s that it merits brief notice. 

A close look at how commerce and finance functioned within the 
hegemonic bloc of the system provides the key to virtually all later 
developments. Though the Union League clubs that quickly formed 
in most major cities in the North certainly enrolled a majority of 
major investors during the war, a substantial number of bankers and 
merchants remained opposed to the new Republican bloc. The core 
of this Democratic opposition consisted mostly of merchants and 
financiers with strong commercial ties to the South or overriding 
commitments to free trade (such as New York banker August 
Belmont). Also in this group were a handful of manufacturers who, 
because they dominated world markets for their products, favored 
free trade (such as Cyrus McCormick) and a few railroads (including 
the New York Central) with obvious interests in the return of 
Southern commerce.— 

While Union defeats in the early part of the war created trying 
times for the Republicans, as long as the war lasted this rival bloc 
could offer only limited opposition. As soon as hostilities ended, 
however, it posed a more formidable threat. 

For the end of the war immediately posed the question of what 
policy to pursue toward the South. This automatically raised the 
possibility of an alliance between the “War Democrats” and the 
elements of the Republican bloc that had a long-term interest in the 
revival of the cotton trade and New York City’s traditional 
commercial ties, a lower tariff rate, and a speedy return to the gold 
standard abandoned at the start of the war. 

Though this essay cannot trace the process in detail, precisely this 
alliance emerged in time to revive the Democratic Party. Backed by a 
massive coalition of bankers, merchants, and some (not all) 
important railroad men, President Andrew Johnson treated the South 
rather like another group of similarly connected business leaders 
treated Germany 80 years later, and began reinstalling the old 

leadership of the defeated country into power. He also pursued a 
highly conservative monetary policy designed to get the United States 
quickly back on gold, and laid plans to cut tariffs (Nugent, 1967; 
Coben, 1959). 

All of these proposals generated powerful opposition. The 
Reconstruction, tariff, and monetary policies were sharply opposed 
by many industrialists, especially those in Pennsylvania and the 
Midwest, who complained bitterly about tariff cuts and deflation; 
some railroads, which did not want to have to pay off newly issued 
bonds in sound money; and many Republicans of all stripes whose 
overriding priority was the creation of a viable Republican Party in 
the South to secure the fruits of the Civil War. Johnson had to be 
rescued by superlawyer William Everts, attorney for the Astors and 
the New York Central, and barely escaped impeachment (Nugent, 
1967; Coben, 1959; Burch, 1981a, pp. 26-32). 

Over time the Republican bloc tended to melt away in a 
complicated and confusing pattern. “Liberal Republicans” pressed 
demands for tariff and civil service reform (which almost always 
began with the Customs House, the center of both party 
organizations and tariff abuses). Led by Samuel Tilden, a New York 
bank attorney with the closest possible ties to the big banks and 
many railroads, the Democrats reorganized.- 1 1 Though a complex 
bargain between the Pennsylvania and several other big railroads, 
along with the more familiar agreement to end the occupation of the 
South, deprived Tilden of the Presidency in 1876, polarization 
between industry and finance continued.— In Boston, bankers like 
Henry Lee Higginson joined John Murray Lorbes, and many 
merchants and attorneys such as Moorfield Storey, and split loudly 
from the GOP. Similar events occurred in New York. Sometimes 
referred to as Mugwumps, these groups pushed hard for lower tariffs, 
maintenance of the gold standard, civil service reform, and a foreign 
policy that limited American aggressiveness in the interest of close 
relations with Great Britain (the final source of credit for many in 
these groups).— 

A substantial number of railroads fell in line, either because the 
financiers were coming to control them or because the program 
attracted them. Throughout most of this period the New York 
Central and the Democratic machine that was closely associated with 
it continued to pour stupendous resources into efforts to mobilize 

high turnouts.— 

In 1884 the banks and their allies won with their favorite 
candidate, Grover Cleveland. By then the seesaw pattern of major 
party competition that characterized the rest of the system was 
essentially set. Industrialists (who often favored soft or “softer” 
money than financiers, though never free coinage of silver or 
unlimited issues of greenbacks); some railroad magnates (who 
sometimes backed tariffs for special reasons); many merchants; and 
(mostly inland and small) bankers opposed the Democrats on the 
traditional GOP platform of high tariffs, although a few major 
exporters sometimes were willing to waive (someone else’s) specific 
duties for very carefully circumscribed “reciprocity” treaties that 
would get their own goods into another country. They also expressed 
a willingness to subsidize the merchant marine (which the Democrats 
opposed as contrary to free trade). In a portent of things to come, the 
Republicans became increasingly strident in their calls for a naval 
build-up and foreign expansion in the Caribbean. They also harshly 
criticized the Democrats for their friendship with the British 
(Schirmer, 1972, Chaps. 1-3; Eiteman, 1930). 

Neither party made any serious appeal to workers. Both watched 
impassively while the panic of 1873 destroyed the unionization drives 
of the late 1860s, which had enrolled 2.4 percent of the total work 
force by 1869 (Lebergott, 1972, p. 220). As related in more detail 
below, both parties also favored all necessary force to put down the 
strikes and riots that soared after the onset of early 1870s depression. 
Both opposed virtually all relief during the Great Depression. They 
both also exalted the role of the judiciary in checking relief measures 
passed by occasionally errant legislatures.— 

The parties also ignored all but affluent farmers. Bankers and rail¬ 
roadmen typically dominated the newly created Department of 
Agriculture regardless of which party held power. Both parties also 
greeted farmers, clamoring for regulation of railroads, or much larger 
increases in the money supply than the industrialists would stand for, 
with proposals for increasing exports (Crapol and Schonberger, 
1972) and, as the ethnocultural analysts remind us, with conservative 
religious appeals.— 

D. The System of 1896 

From the standpoint of the investment theory of political parties, the 

System of ’96 is perhaps more satisfactorily treated in recent 
literature than any other U.S. party system. Lawrence Goodwyn and 
Michael Schwartz, for example, have written excellent studies of the 
emergence of organized protest among Southern and Western farmers 
in the 1880s.— While some mystery still surrounds the extent and 
precise nature of farm grievances in this period, these works demolish 
any lingering impression that farm protest was somehow 
“irrational.” They also vividly convey the agonizing difficulties that 
confront any mass movement that seeks to transform ordinary voters 
into major political investors. A number of authors, of whom David 
Montgomery (1979) and Jeremy Brecher (1972) are perhaps the most 
notable, have also extensively analyzed the savage repression 
accorded organized labor after 1877, when the great railway strike 
and related upheavals heralded the arrival of a new and 
extraordinarily fierce stage of class conflict in American life. And 
Walter Dean Burnham’s careful analysis of the striking drop in voter 
turnout that began around 1896 and his discussion of the System of 
’96 have explored the most important political efforts by 
industrializing business elites to insulate themselves from popular 
reaction at this time.— 

Because this literature states the general problems so well, and 
because I hope shortly to publish a much longer analysis of the 
System of ’96, this sketch will develop only a few major themes.— 

It is convenient to begin by taking a closer look at the controversies 
engendered by Burnham’s discussion of turnout decline during this 
period. At first glance, it is surprising that anyone would doubt that 
the sharp decline in turnout was related to industrialization. For as 
Montgomery and others have stressed, throughout the period 
industrial conflicts rose sharply. They burst forth in peaks of mass 
violence several times in the 1880s, in the Great Depression of the 
1890s, and then again during World War I, when a stratospheric 
strike rate and widespread union agitation brought on the temporary 
destruction of most of organized labor through the combined effects 
of the great Red Scare, the Palmer raids, extensive deployment of 
federal troops, and something like civil war in parts of Pennsylvania 
affected by the great steel strike.- 1 That these processes, not to 
mention the spread of Taylorism and “scientific” management in 
factories or the widespread destruction of craft unions that marked 
the period, could proceed in anything remotely resembling a 

democracy strains credulity. 

Still, the Burnham-Converse controversy is well known. For more 
than a decade now, alternative theories that explain the turnout 
decline as an artifact of rural vote frauds or institutional changes 
unrelated to industrialism have been discussed and suggestions 
seriously voiced that Burnham was somehow a “conspiracy theorist” 
(Burnham, 1974; Converse, 1972 and 1974; Rusk, 1970 and 1974). 

Rather than review the debates in detail in this paper, it makes 
sense to test the global hypotheses. If Burnham rather than Converse 
or Rusk is correct, turnout decline after 1896 should be proportional 
to the spread of industrialism within various states (outside the 

Now, this is a straightforward proposition to test. Measuring 
turnout decline by the drop in turnout between the 1890s and mid- 
1920s, and industrializaton by the growth of manufacturing value 
added per capita between 1880 and 1929, let us test for a 
relationship between vote loss and industrial growth. Figure 1.3 
shows the remarkable result: save for three states with perhaps 3 
percent of the population, industrialization and turnout decline stand 
in an almost linear relationship. 

A recent analysis of the spread of the Australian ballot after the 
late 1880s concluded that the “reform” was deliberately designed to 
weaken third parties like the Populists (Argersinger, 1980). Further 
evidence that the turnout decline of this period was no accident is 
visible in table 1.1 . which summarizes the development of restrictive 
suffrage among the states from 1789 to 1940. It shows several 
interesting trends. After 1890 the nineteenth-century trend toward 
the elimination of the poll tax abruptly reversed. There is also a sharp 
rise in the number of states imposing other taxes on voters. Residence 
requirements stiffened, especially at the ward level, though at the 
state level these had been tightening since the Jacksonian period. 
Registration requirements proliferated between 1890 and 1912, while 
educational requirements, almost unknown before the 1890s, became 
far more common, even in the North.— Most striking of all, 
however, a complete reversal of attitude took place toward the 
common mid-nineteenth century practice of allowing aliens who had 
declared their intent to obtain U.S. citizenship to vote. 






$ Gain in Manufacturing Value Added per Capita in State 
Between 1889 and 1929 

FIGURE 1.3. Outside the Southern States (and the Exceptions Noted in the Text), Voting 
Turnout Decreased in Proportion to the Growth of Manufacturing Within States 

Note: Standard errors in parentheses; for sources and other comments, see text. 

Once industrial power is accepted as the final cause of the legal 
changes, extralegal pressures, party efforts to recruit voters, and the 
simple removal of many issues from politics that all combined to 

reduce voter turnout during the System of ’96, plenty of other 

1 0 2 

questions remain.— 

One of the most urgent is very simple, but seldom asked: how 
could the rise of manufacturing, a long-term process, possibly 
account for the sudden emergence of the System of ’96, which 
required at most a few years? 

TABLE 1.1 Number of States with Selected Suffrage Limitations 











Specific property 







5(+6) 2 








16 J 



2 Years 









1 Year 









6 Months 









4 Months 









3 Months 










city, etc. 

1 Year 








6 Months 








5 Months 








4 Months 








3 Months 








2 Months 








1 Month 







6( + l) 4 

10 Days 

Residence—ward, etc. 








90 Days 






3(+4) 5 

4(+7) 6 

60 Days 







4< + l) 7 

30 Days 







14( + 2) g 

10 Days 















Serious crime 








Alien (allowed) 









Pauper, dependent, etc. 







44 9 


























Sources: This table has been prepared from information supplied by many sources, including 
various state constitutions and statutes. But most of it comes from four large-scale surveys of 
state voting provisions: O. H. Fisk’s Stimmrecht und Einzelstaat in den Vereinigten Staaten 
von Nordamerika (Leipzig: Verlag von Duncker & Humbolt, 1896); The Legislative 
Reference Bureau of the Rhode Island State Library’s General Constitutional and Statutory 
Provisions Relative to Suffrage (Providence: Freemen, 1912); Richard Boeckel, Voting and 
Non-Voting in Elections (Editorial Research Reports, 1928); Council of State Governments, 
Voting in the United States (Chicago: Council of State Governments, 1940). 

All summary efforts like these have problems stemming from minor variants among similar 
state laws and the occasional loopholes or special qualifications created by states. For 
example, in 1830 New York had a three-year residence requirement for the “man of color.” 
Should New York figure in the table as a state with a residence requirement or not? My 
answer was no, on the grounds that this would be too specific a usage for a category that 
usually represents a far more universal disability. Similar problems attend some of the other 
categories, especially “serious crime” and “paupers.” “Serious crime” is a catchall category 

that varies from state to state. Much state legislation barring the lowest classes from voting 
(“paupers”) lumps them together with maniacs alcoholics, or other types of “dependents.” 

I have attempted to standardize among the sources by checking likely exceptions and cases 
that stand out as anomalous between them, so the figures here sometimes differ from any 
particular sources. Where exact details about individual states became important, however, 
recourse should be had to each source’s notes and the state’s consitution and statutes, for 
more exceptions exist than are noted here. 

It should also be noted that several states’ literacy requirements were waived for the 
occasional affluent illiterate: i.e., one could buy into the franchise if one could not pass the 
literacy test. Note: Blank space = no information; — = zero as far as ascertainable. 

1. Includes two states in which property owners alone could vote on special tax and debt 
issues and one state in which they alone could vote on expenditures. 

2. The second figure (6) applies only to elections for bond issues. 

3. Includes one state in which tax requirement applies for votes on taxation and one in 
which it is required at state and county levels for votes on council and expenditures. 

4. One state required 40 days. 

5. Three states required 90 days: two required 6 months; and two required 4 months. 

6. Four states required 90 days; six required 6 months; one required a full year. 

7. One state required 40 days. 

8. Two states required 20 days. 

9. Includes 12 states which specifically exclude paupers and 18 which declare their desire to 
exclude illiterates (not all these had literacy tests). 

To contemporaries the decisive factor in the alteration of the party 
system was obvious. It was the defeat of the Gold Democrats by the 
Free Silver and Populist forces and the subsequent move by most of 
the former into the Republican Party. 

But while this accounts superbly for the timing of the realignment 
and certainly explains the intense unity the Republicans displayed in 
the 1896 campaign, it fails to provide any clues why many of the 
Gold Democrats became Republicans. We have no hints why some, 
but not all, of the Gold Democrats returned to the Democratic Party 
or why financiers who had regularly crossed party lines earlier 
became permanently enamored of the GOP. 

The answer to this question comes only from a close scrutiny of the 
major investors in both parties. As previously suggested, after the 
1870s, controversies over the tariff, gold, and foreign policy found 
many, almost certainly most, major bankers in the Democratic Party. 

Grover Cleveland’s efforts in his first term to lower tariffs, reform 
the Customs Service, extend civil service, and defuse tensions with 
Great Britain during the 1888 Venezuelan crisis provided the Gold 
Democrats’ finest moments. In the 1890s, however, this 
internationalist drive began to slow down. Cleveland in his second 
term was only slightly less bellicose toward the British than the 
Republicans. William C. Whitney and other New York Democrats 

temporized on the tarif, and industrially oriented figures like 
Attorney General Richard Olney (a Pullman Co. stockholder who 
was responsible for Cleveland’s dispatch of troops to break the strike 
at Pullman) received major appointments (Schirmer, 1972, Chap. 3; 
Burch, 1981b, pp. 96-103). 

What was happening is perfectly obvious but rarely noted. The 
financiers were investing more and more in American industry. They 
were beginning to acquire some of the same interests in tariffs, 
aggressive foreign policies, and export drives against British 
competitors that the industrialists shared. In addition, their own 
rising sense of importance tempted them to claim a bigger role in 
world finance. 

The climax of this process was the breathtaking merger movement 
of 1897-1901. Led by a handful of investment bankers, notably J. P. 
Morgan (whose law firm retained Cleveland between terms), this 
wave of mergers placed bankers on the boards of hundreds of 
corporations. Centralizing the economy as never before, the great 
merger wave created a series of gigantic new corporations in which 
the bankers had major influence. The perfect symbol of the new unity 
between banking and industry that the movement created was the 
biggest merger of all, United States Steel: Andrew Carnegie, the 
industrialist, sold out to Morgan, the investment banker. — 

Parallel to the industrial merger movement was a massive 
consolidation of many increasingly shaky (often actually bankrupt) 
railroads (Kolko, 1965, Chap. 4). Superintended by Morgan and a 
handful of other bankers, this step essentially ratified the 
disintegration of the Civil War System’s hegemonic bloc and further 
consolidated the new unity within the business community. 

With manufacturing now playing a new pivotal role in the plans of 
the major investors in both banks and railroads, a switch of 
sentiment on the tariff was inevitable. 

Though most leaders of these consolidations (like many big 
manufacturers) continued to press for highly selective “reciprocity” 
agreements with a few countries that would open particular export 
markets to goods their more successful corporations produced, their 
interest in “free trade” abruptly disappeared. They accepted 
protection in principle, and helped build the GOP around it. The ne 
plus ultra of this accommodation was probably reached in 1909, 
when Morgan fine-tuned a tariff bill by telegraph from his yacht 
(Wiebe, 1962, p. 107). 

Other issues of foreign economic policy helped cement the 
developing unity between industry and finance. The gold standard, 
formally adopted in 1900 after discussions too complex to trace here, 
was obviously a foreign economic theme that united this Republican 
“national capitalist” bloc. So, too, was imperialism, though 
aggressive imperialists were concentrated in a few sectors: steel and 
munitions, obviously, some foodstuffs, and textiles, which collided 
head on with British and German competition in Latin America, the 
Far East, and elsewhere.— 

But while an analysis of the GOP elites accounts perfectly for their 
behavior during the System of 1896, what explains their ability to 
carry if off so well, so long? For, after all, a substantial if only 
occasionally successful second party existed throughout the period. 
An explanation is required of why this party only rarely challenged 
the repressive character of the party system that is also consistent 
with the obvious fact that it remained another party. 

The beginning of the answer has already been supplied in the 
earlier discussion of labor policy and class conflict. Outside of a few 
crafts, labor unions, socialist or nonsocialist, were victims of 
unremitting attack all during that period. In most industries they 
could not even get a toehold. The notion that workers who could not 
even organize their own industry could control a party structure that 
was now extended over the entire United States is utterly fantastic. It 
could be seriously entertained only by analysts who have not 
systematically examined differences in public policy between 
government structures with and without labor union participation. 

The point can be reinforced by a glance at the state of mass politics 
in the Democratic Party. Lawrence Goodwyn has brilliantly depicted 
the organizing efforts of the People’s Party which led up to the 1896 
debacle. By comparison with any mass movement before or since, the 
Populists were incomparably better prepared to contest control of the 
state apparatus. They were solidly rooted in local organizations. They 
had their own press, speakers’ bureaus, and festivals. That most of 
their forces were concentrated in one party provided them with yet 
another advantage over most groups seeking to influence the 
government (Goodwyn, 1976, Chap. 12). 

But they were easily knocked over in the Democratic Party, not by 
the business community as a whole but by a single sector. In the mid- 
1890s silver companies poured resources into the party, hoping to 
secure government aid. As Goodwyn’s work shows in detail, the 

farmers and their allies were no match for Anaconda, the Hearst 
interests (which owned not only newspapers but silver mines), and 
their allies.—— In state after state, the silver companies picked off the 
Populist Party leaders one by one. The mining companies sealed their 
triumph by installing an editor of one of their newspapers, William 
Jennings Bryan, as the party’s nominee (Goodwyn, 1976, Chap. 13). 
The largest, best-organized, and most cohesive mass political 
movement in American history could not compete with even a part of 
the business community. 

Since control of the national party was literally beyond the means 
of the Populists, and labor unions remained weak throughout the 
period, power within the Democratic Party passed virtually 
automatically to the only groups that could afford to exercise it: 
businessmen and affluent farmers. 

These were rather more numerous than most references to 
“Republican business dominance” within the System of 1896 suggest. 
For most of the party system, they included a still-substantial bloc of 
investors who remained committed to free trade: Southern planters, 
of course, but also importers (who were concentrated in port cities); a 
handful of multinationals without major overseas competitors who 
wanted lower tariffs, like International Harvester; copper companies, 
whose American refineries could process foreign ores only if tariff 
rates were secure; many, though far from all, retailers; mercantile and 
financial elites who missed the 1890s’ move into industry; some 
railroads (including the head of the Pennsylvania) and utilities 
(including the head of New York’s Consolidated Edison); and last, if 
scarcely least, foreign multinationals, who promoted the party to get 
their wares through Republican tariff walls.— 

Virtually all of these interests shared Republican views on the 
desirability of bureaucratic reform—reform of civil service, reform of 
the diplomatic service, reform of municipal government.— They 
were also as frightened of the mass populace as any Republican. 
Grasping intuitively the investment theory of political parties’ 
principle of noncompetition across basic investor interests, they 
accordingly made few moves to stir the “Great Beast” (as Plato 
sometimes referred to the citizens of another democracy). Instead, 
they promoted their own version of Democratic Progressivism, which 
(along with many Republicans) gradually accepted women’s suffrage 
and on occasion made a few gestures toward labor (chiefly in regard 
to disability compensation). When the Republicans split, or when 

crosscutting issues like the Federal Reserve temporarily disrupted 
normal politics, this was sometimes enough to win—in an electorate 
that grew smaller and smaller as a percentage of the potential 

For about a decade after the turn of the century the issue of 
antitrust did create turbulence in both parties, and especially within 
the Democratic Party. Here again, however, the main forces at work 
exhibited only an indirect relationship to mass electoral pressures. As 
Alfred Chandler has observed, among the most powerful forces 
operating in favor of antitrust were the thousands of small-town 
wholesalers and distributors threatened by the growth of forward 
integration among manufacturers and the spread of major retailing 
concerns (Chandler, 1980). Other important support for antitrust 
measures came from the shoe industry, whose numerous firms 
directly confronted a giant trust, United Shoe Machinery, and from 
some importing merchants who feared the power of concentrated 
buyers. Independent oilmen, who proliferated after the new oil 
discoveries in Texas and elsewhere, also strongly favored vigorous 
antitrust enforcement. 

While partisan differences were slight, the Democrats tended to 
come down somewhat more strongly on this issue. Not only were the 
trusts to be busted headed by predominantly Republican 
businessmen, but several peculiar features of geography strengthened 
the party’s commitment as well. In Boston the dense concentration of 
shoe companies, small savings banks, and merchants created a real 
basis for a thin “reform” stratum within the business community that 
helped sustain the heterodox opinions of Oliver Wendell Holmes, Jr. 
and Louis Brandeis. In the largely Democratic South and West, 
independent oilmen often constituted the wealthiest segments of the 
local business community. There the antitrust sentiment merged 
easily with sentiment for free trade and an income tax (paid largely 
by the affluent East) to form an aggressive small-scale capitalist 
ideology that has often been confused with mass-based populism.^ 

E. The New Deal System 

Because I have recently published a formal analysis of the growth of 
the New Deal coalition out of the slowly disintegrating System of ’96, 
and coauthored a lengthy analysis of the gradual dealignment of the 
New Deal System, 1 this paper’s analysis of what might be termed 

the System of ’36 will be even more summary than the preceding 
sketch of the System of ’96. 

Perhaps the most important point to stress concerns the precise 
nature of the New Deal coalition. To attain a clear view of the New 
Deal’s uniqueness and significance it is necessary to break with most 
of the commentaries of the past 30 years, go back to primary sources, 
and attempt to analyze the New Deal as a whole. 

As outlined in detail in the next essay, what stands out is the novel 
type of political coalition that Franklin D. Roosevelt built. At the 
center of this coalition, however, are not the workers, blacks, and 
poor that have preoccupied liberal commentators, but something else: 
a new “historical bloc” (in Gramsci’s phrase) of high-technology 
industries, investment banks, and internationally oriented commercial 

The origins of this bloc are most conveniently traced by beginning 
with World War I, which abruptly disrupted the tight relationship 
between industry and finance that defined the System of ’96. 

Overnight the United States went from being a net debtor to being 
a net creditor in the world economy, while the tremendous economic 
expansion the war induced destabilized both the United States and 
the world economy. Briefly advantaged by the burgeoning demand 
for labor, American workers also struck in record numbers and for a 
short interval appeared likely to unionize extensively. 

Not surprisingly, as soon as the war ended, a deep crisis gripped 
American society. In the face of mounting strikes, the question of 
U.S. adherence to the League of Nations, and a wave of racial, 
religious, and ethnic conflicts, the American business community 
sharply divided. 

On the central questions of labor and foreign economic policy, 
most firms in the Republican bloc were drawn by the logic of the 
postwar economy to intensify their commitment to the formula of 
1896. The worldwide expansion of industrial capacity the war had 
induced left them face to face with vigorous foreign competition. 
Consequently they became even more ardent economic nationalists. 
Meeting British, French, and later German and other foreign 
competitors everywhere, even in the United States home market, they 
wanted even higher tariffs and further indirect government assistance 
for their export drives. Their relatively labor-intensive production 
processes also required the violent suppression of the great strike 
wave that capped the boom of 1919-1920, and encouraged them to 

press the notorious “open shop” drive that left organized labor 
reeling for more than a decade. 

By contrast, the new political economy of the postwar world 
pressured a relative handful of the largest and most powerful firms in 
the System of ’96’s hegemonic bloc in the opposite direction. The 
capital-intensive firms that had attracted increasing attention since 
the beginning of the System of ’96 and which had grown 
disproportionately during the war were under far less pressure from 
their labor force. The biggest of them also had developed by the end 
of the war into not only American but world leaders in their product 
lines. Accordingly, while none of them were pro-union (legislation 
along the lines of the Wagner Act would have struck them as 
incredible), they preferred to conciliate rather than to repress the 
work force. Those that were world leaders also favored lower tariffs, 
both to stimulate world commerce and to open up other countries to 
them. They also supported American assistance to rebuild Europe, 
which for many of them, such as Standard Oil of New Jersey and 
General Electric, represented an important market. 

Joining the industrial interests of this second bloc were the 
international banks. Probably nothing that occurred in the United 
States between 1896 and the Depression was so fundamentally 
destructive to the System of ’96 as the World War I-induced 
transformation of the United States from a net debtor to a net 
creditor in the world economy (Kindleberger, 1977; Ferguson, 1984, 

The overhang of both public and private debts that the war left in 
its wake struck directly at the accommodation of industry and 
finance that defined the Republican Party. To revive economically, 
and to pay off the debts, European countries had to run export 
surpluses. They needed to sell around the world, and they, or at least 
someone they traded with in a multilateral trading system, urgently 
needed to earn dollars by selling into the United States. Along with 
private or governmental assistance from the United States to start up 
when the war ended, accordingly, the Europeans required a portal 
through the Republican tariff walls that shielded U.S. manufacturers 
from the outside world. 

For reasons of space this paper cannot trace in any detail how 
spiraling conflicts over labor and foreign policy between the older 
System of ’96 group and the newer multinational bloc led 
increasingly to the disintegration of the Republican Party, so that by 

1928 the partisan alignments of 1896 had disappeared altogether. 

All that can be observed here is that the long-run trends in the 
world economy greatly favored the multinational bloc. With the 
notable exceptions of the big chemical and national oil companies, 
this bloc included the largest, most rapidly growing corporations in 
the economy. They were the recognized industry leaders with the best 
and most sophisticated managements. Perhaps even more 
importantly, they embodied the norms of professionalism and 
scientific advance which fired the imagination of large parts of 
American society in this period. The largest of them also completely 
dominated all major American foundations, which, during the System 
of ’96, had come to exercise major influence on not only the climate 
of opinion but also the specific content of American public policy. 
And, while I cannot stop in this chapter to justify the claims, what 
might be termed the “multinational liberalism” of the 
internationalists was also aided importantly by the spread of liberal 
Protestantism; by a newspaper stratification process which brought 
the free trade organ of international finance, the New York Times, to 
the top; by the growth of capital-intensive network radio in the 
dominant Eastern, internationally oriented environment; and by the 
rise of major newsmagazines, which, as Raymond Moley himself 
observed while taking over at what became Newsweek, provided 
“Averell” [Harriman] and “Vincent” [Astor] “with a means for 
influencing public opinion generally outside of both parties.”— 

Not surprisingly, it was during the great boom of the 1920s that 
the representative capital-intensive, multinationally oriented 
American business firm ascended to the pinnacle of the economy: the 
giant integrated oil company (see table 1.2 . which gives rankings of 
the thirty largest industrials from 1909 to 1948). 

Space limitations also preclude this paper from doing more than 
asserting what I have sought to document in detail elsewhere: that 
between 1935 and 1938 this emergent bloc came together around 
Roosevelt’s Second New Deal (Ferguson, 1984, n.d.). 

Because these firms were mostly capital-intensive, the rise in the 
power of organized labor that the Wagner Act permitted and the very 
limited intervention in market-determined patterns of (lifetime) wage 
setting that Social Security represented posed less of a threat to them. 
And their dominant position in the world economy made them the 
leading beneficiaries and most ardent champions of the other part of 
the New Deal’s reform package—Secretary of State Cordell Hull’s 

famous reciprocal trade program, which broke decisively with the 
System of ’96’s protectionism. (Oil companies, in addition, profited 
handsomely from the Interstate Oil and Gas Compact legislation 
which established the framework that fixed the price of oil for a 

But while the biggest investors in the New Deal—including the 
dramatic election of 1936—were the multinationals and their 
internationalist allies among domestic exporters, there is no point in 
denying the obvious. To many within this group, even the almost 
dormant American Federation of Labor (several of whose top 
officials had become enmeshed in a close patron/client relationship 
with the larger firms within this bloc)— represented a graver threat 
than they felt comfortable with. While, left to themselves, the firms in 
the multinational bloc might have sponsored company unionism and 
made less extensive use of the private armies and detective agencies 
than more labor-intensive firms, they surely would not have created 
the Congress of Industrial Organizations (CIO). 

That independent industrial unionism emerged during the New 
Deal is primarily a result of one factor: that, for the first time in 
American history, masses of ordinary voters organized themselves 
and succeeded in pooling resources to become major independent 
investors in a party system. Their success in this decade contrasts 
vividly with their failures during previous party systems, and vividly 
underscores the investment theory of political parties’ strictures on 
the importance of distinguishing between simple rises in voter 
turnout, such as characterized the Jacksonian Party System, and the 
real growth in the political power of mass voters that came with their 
effective organization. 

In a longer analysis of the New Deal System, several stages could 
helpfully be distinguished within it. The rise in the power of labor, 
for example, came to an abrupt halt during or soon after World War 
II. A massive campaign led by the National Association of 
Manufacturers pushed through the Taft-Hartley Act, and the Truman 
administration initiated the first of several security investigations of 
the left wing of the Democratic Party. 

TABLE 1.2 Largest American Industrials at Various Points in Time (Ranked According to 


1. U.S. Steel 

2. Standard Oil of New Jersey 

3. American Tobacco 

4. International Mercantile Marine 

5. Anaconda 

6. International Harvester 

7. Central Leather 

8. Pullman 

9. Armour 

10. American Sugar 


1. U.S. Steel 

2. Standard Oil of New Jersey 

3. Armour 

4. Swift 

5. General Motors 

6. Bethlehem Steel 

7. Ford 

8. U.S. Rubber 

9. Socony Mobil 

10. Midvale Steel and Ordnance 


1. U.S. Steel 

2. Standard Oil of New Jersey 

3. General Motors 

4. Standard Oil of Indiana 

5. Bethlehem Steel 

6. Ford 

7. Socony Mobil 

8. Anaconda 

9. Texaco 

10. Standard Oil of California 


1. Standard Oil of New Jersey 

2 . U.S. Steel 

3. General Motors 

4. Socony Mobil 

5. Standard Oil of Indiana 

6. Ford 

7. Bethlehem Steel 

8. Anaconda 

9. DuPont 

10. Standard Oil of California 

11. U.S. Rubber 

12. American Smelting & Refining 

13. Singer 

14. Swift 

15. Consolidation Coal 

16. General Electric 

17. ACF Industries 

18. Colorado Fuel and Iron 

19. Corn Products Refining 

20. New England Navigation 

11. General Electric 

12. International Mercantile Marine 

13. International Harvester 

14. Anaconda 

15. Sinclair 

16. Texaco 

17. American Smelting and Refining 

18. DuPont 

19. American Tobacco 

20. Union Carbide 

11. General Electric 

12. DuPont 

13. Shell 

14. Armour 

15. Gulf 

16. Sinclair Oil 

17. International Harvester 

18. General Theater Equipment 

19. Swift 

20. Kennecott 

11. Texaco 

12. Gulf Oil 

13. General Electric 

14. International Harvester 

15. Shell 

16. Sinclair 

17. Koppers 

18. Kennecott Copper 

19. Swift 

20. Armour and Co. 

TABLE 1.2 Largest American Industrials at Various Points in Time (Ranked According to 
Assets) (continued) 


1. Standard Oil of New Jersey 

2. General Motors 

3. U.S. Steel 

4. Standard Oil of Indiana 

5. Socony Mobil 

6. Texaco 

7. DuPont 

8. Gulf Oil 

9. General Electric 

10. Ford 

11. Standard Oil of California 

12. Bethlehem Steel 

13. Sears, Roebuck and Co. 

14. Union Carbide 

15. Sinclair Oil 

16. Westinghouse 

17. American Tobacco 

18. International Harvester 

19. Anaconda 

20. Western Electric 

Source: A.D.H. Kaplan, Big Enterprise in a Competitive Setting (Washington, D.C.; 
Brookings, 1962), pp. 140 ff. 

But while these and related measures halted labor’s advance, they 
did not turn the clock back to the early 1920s. The rise in unionism 
merely halted and began a slow decline that has now lasted for 
almost a generation. Other legislative enactments, such as the 1959 
Landum-Griffith Act, also incrementally trimmed labor’s power, but 
did not fundamentally alter the status quo.— 

More recently the flight of business to the Sunbelt, where labor is 
weak, and abroad, where it cannot go, and the failure of President 
Jimmy Carter’s labor law reform initiative in the late 1970s have in 
combination with new organizing initiatives by the business 
community, such as the creation of the Business Roundtable, eroded 
organized labor’s position. 

Rather more serious has been the deterioration of the network of 
community groups generated in the course of struggles over the rights 
of blacks, women, and the poor. Such groups flourished in the 
turbulent 1960s, when the economy was expanding and substantial 
financial assistance was available from the government and large 
foundations.— Since the recession of 1973-1974, however, their 
position has become increasingly precarious. Only the more 
conservative parts of the feminist and black movements continue to 
attract substantial funds from more liberal investors. 

By contrast with the almost glacial pace of change with regard to 
labor policy, the other crucial policy outcome involved in the New 
Deal alignment—its commitment to internationalism—has come 
under increasingly severe challenge. 

Though this essay cannot elaborate on the point here, the shape of 
things to come on this issue was clearly visible as far back as the 
1936 election. After a bitter internal struggle, Republican nominee 
Alf Landon repudiated Hull’s reciprocal trade policies. Enraged, 
many high-level businessmen in the party abandoned Landon’s 
campaign and endorsed Roosevelt (Ferguson, 1984). All through the 
1940s similar controversies flared; they were especially bitter when 
issues like the ratification of the International Trade Organization 
Treaty were pending. 

While proliferating opportunities for investment abroad 
strengthened many large firms’ commitment to internationalism after 
World War II, the revival of world economic competition in the 
1950s sharpened protectionist tendencies in industries like steel, 
textiles, and shoes. The predictable result was a growth of right-wing 
nationalist sentiment within the Republican Party. Often strongly 

critical of the United Nations, foreign aid, and the Rockefeller family, 
such groups joined with many independent oilmen to provide most of 
the force behind the Barry Goldwater candidacy in 1964. (Ferguson 
and Rogers, 1981, p. 12; Burch, 1973, pp. 120-21, n. 51). They have 
also weighed heavily in Republican primaries ever since (Ferguson 
and Rogers, 1981, pp. 12 ff.). 

By 1971, as imports from Japan surged into the United States and 
the first absolute trade deficit in modern U.S. history appeared, 
nationalist sentiment within the business community was 
mushrooming. The Nixon administration responded with its famous 
New Economic Policy, with consequences too vast to be considered 

Thereafter, the international economic system, and thus American 
party politics, lurched from one crisis to another. The Organization 
of Petroleum Exporting Countries (OPEC) raised prices, raw-material 
prices briefly surged, food prices soared, and bank loans to Third 
World countries expanded immensely. By the mid-1970s it was clear 
that economic growth in the advanced countries was slowing down 
while in parts of the Third World it was booming. 

In time it is possible that these and other forces too complex to 
consider here might produce a realignment in American politics. By 
itself slow growth is likely to generate rising dissatisfaction among an 
increasingly squeezed population. In addition a major crisis is 
brewing inside the Democratic Party. While the New Deal 
transformed the party into a historically unique coalition of capital- 
intensive, multinationally oriented businesses and organized labor, 
almost every major trend in the world economy now militates against 
that order. In the wake of OPEC’s price increases, the United States 
held down the domestic price of oil through a complex system of 
special price controls. The price of natural gas was also strictly 
regulated. The astronomical sums involved made these programs 
some of the largest income transfer programs in world history.— 
Not surprisingly, most oil and gas companies ardently supported 
lifting the controls. Because it struck so massively at labor, blacks, 
and the poor, however, such a move was almost impossible for most 
Democrats to sponsor. As a consequence, the oil industry, which had 
played a pivotal role in the emergence of the Roosevelt coalition and 
had longstanding ties to high levels of the Democratic Party, became 
almost monolithically Republican in the mid-1970s.— 

Rising business interest in an increasingly unstable Third World 

has also operated to weaken the Democratic Party. While serious 
differences over the size of the total defense budget and specific 
weapons programs persist within the business community, interest in 
higher military spending still has tended to unite both nationalists 
and internationalists (Ferguson and Rogers, 1981, pp. 18-19). But 
economic stagnation now makes it impossible to fund both social 
welfare and higher defense budgets without higher taxes. 
Accordingly, the Democratic Party is coming apart, riven by struggles 
between the party’s mass base, which needs more, not less, social 
welfare spending, and its elite constituency, which would prefer to 
reform the budget process, cut social spending, and raise defense 
expenditures. In addition, Japanese imports are surging, raising 
demands from labor for protection that collide head on with the 
internationalists’ desire for an open world economy. How this 
struggle will be resolved is anyone’s guess, but it is instructive to see 
what an investment theory of parties predicts. It will be recalled that 
turnover among the top thirty firms during World War I and the 
boom of the 1920s heralded the ascent of the multinational bloc 
within a new party system. Until recently, a list of these major 
investors would have reflected little change since the New Deal—the 
rise, mainly, of electronics firms, and a further decline of steel. The 
last few years, however, suggest that major turnover within these 
ranks may be imminent. A new merger movement among the giants, 
spectacular failures of once multinationally oriented firms like 
Chrysler, the wreck of the auto industry, and, most recently, a major 
decline in oil prices suggest that new realignments with new blocs of 
investors could be in the offing. 


The early sections of this paper raised fundamental questions about 
conventional electoral theories of American politics. Virtually all 
subsequent discussion has concentrated on elaborating and testing 
alternative accounts of party systems and electoral competition. 
While all results remain preliminary and tentative, it is now 
appropriate to look briefly at what this effort to interpret American 
political history in industrial terms says that is new or, at least, 

Here, it seems to me, one conclusion stands out ahead of all others: 
that the “welfare effects”—the tendency to satisfy popular demands 

—that most liberal political analysis attributes to two-party 
competition have been greatly overstated. This does not mean that 
voters never influence public policy or even that they do not 
constantly do so. It does imply, however, that their influence on state 
policy is highly variable and uncertain. In a political system like that 
of the United States, the costs associated with control of the state 
effectively screen out the bulk of the electorate from sustained 
political intervention. Accordingly, as the last section’s review of 
American party systems suggested, power passes ineluctably to 
relatively small groups of major investors. And political changes are 
usually—but not always—intimately involved with shifts in the 
balance of power among these large investors. 

These fundamental points have vast implications. The potential 
significance of voter turnout, for example, changes abruptly. Many 
discussions of declining voter turnout implicitly link high voter 
turnout with effective democratic control of the polity. Now it is easy 
to understand why, for whatever can be imagined as a logically 
possible outcome, in the real world a political system that 
consistently serves the interests of a mass of nonvoting citizens is 
most improbable. But as the discussion of the Jacksonian period 
suggested, high voter turnout may indicate strong popular demands 
on the political system—or it may simply indicate that elites are 
willing to subsidize the cost of participation. To assess the meaning 
of voting in such situations, a hard look is vital at the resources 
available to individual voters to form and express an opinion—and 
above all to participate in secondary organizations. In this respect, I 
think, the American experience has been less than edifying. 

Another common practice in American political science that this 
inquiry raises questions about concerns the conventional distinction 
between “foreign” and “public” policy. Few contemporary studies of 
American politics afford foreign policy questions the weight they 
deserve as factors in domestic party politics. From the Federalist acts 
of binary fission to the New Deal’s controversial free trade policy, 
however, American parties have fought bitterly over foreign policy 
issues. Considering the peculiar monopoly that the national state 
enjoys in foreign policy, it is time to abandon the notion that 
“politics stops at the water’s edge.” Analysts of public policy should 
normally expect to find questions of the world economy, foreign 
policy, and transnational relations acting to divide political investors. 
And election analyses, if they purport to deal with reality, should 

normally explain how industrial blocs, campaign issues, and 
international relations affect electoral outcomes. 

Finally, if one considers the basic meaning of what might be 
termed the “microeconomics of voter control” implied by the 
investment theory of parties, then certain forms of interventions to 
create really effective democratic structures can readily be envisaged. 
Once it is clear that most ordinary people cannot afford to control 
the governments that rule in their name, then the normative remedy 
is obvious: public participation must be subsidized— and the costs of 
its major forms made as low as possible. 

This recommendation, however, must be understood in the context 
of this essay’s earlier discussion of the social nature of information 
and action. The prerequisites for effective democracy are not really 
automatic voter registration or even Sunday voting, though these 
would help. Rather, deeper institutional forces—flourishing unions, 
readily accessible third parties, inexpensive media, and a thriving 
network of cooperatives and community organizations—are the real 
basis of effective democracy. 


This paper was originally part of a larger study which was divided 
and revised for publication. The first part of the longer paper, 
analyzing existing electoral theories of American politics and critical 
realignments, appeared as “Elites and Elections; Or What Have They 
Done to You Lately? Toward an Investment Theory of Political 
Parties and Critical Realignment,” in Benjamin Ginsberg and Alan 
Stone, eds., Do Elections Matter ? 1st ed. (Armonk, N.Y.: Sharpe, 
1986). An appendix to the original paper which attempts to integrate 
the present essay’s historical analysis of the relationship between 
business structures and American party systems with available 
statistical data on the law partners, business connections, and 
corporate affiliations of high federal officials has had to be dropped 
here, for reasons of space. 

I should particularly like to thank Walter Dean Burnham, Gerald 
Epstein, Arthur Goldhammer, Robert Johnson, and Paul Zarembka 
for their comments on drafts of this essay. For important assistance 
with other parts of the study I am also grateful to Richard DuBoff, 
Benjamin Ginsberg, Lawrence Goodwyn, Duane Lockard, Samuel 
Popkin, Gail Russell, and Martin Shefter. Early discussions of 

Anthony Downs’s work with Stanley Kelley, and of Mancur Olson’s 
with Tim Scanlon and William Baumol, were also very helpful. 
Thanks also to Gavan Duffy, Cynthia Horan, and Lola Klein for 
additional assistance. It should not be necessary to add that readers 
and critics of a paper cannot be held responsible for its contents— 
only its author can. 


Allison, G. (1971), The Essence of Decision, Boston: Little Brown. 

Argersinger, P. (1980), “A Place on the Ballot.” American Historical Review 85 (April 

Bachrach, P., and Baratz, M. (1970), Power and Poverty, New York: Oxford 
University Press. 

Barry, B. (1970), Sociologists, Economists, and Democracy, London: Collier- 

Bartlett, R. (1973), Economic Foundations of Political Poiver, New York: Free Press. 

Bauer, R., Poole, I., and Dexter, L. (1972), American Business and Public Policy, 
Chicago: Aldine. 

Beard, C., and Beard, M. (1934), The Rise of American Civilization, New York: 

Benson, L., Silbey, J., Field, P. (1978), “Toward a Theory of Stability and Change in 
American Voting Patterns: New York State, 1772-1970.” In Silbey, J., Bogue, A., 
Flanigan, W. eds., The History of American Electoral Behavior, Princeton: 

Princeton University Press. 

Bernstein, I. (1950), The Neiv Deal Collective Bargaining Policy, Berkeley, Calif.: 
University of California Press. 

Bogue, A. (1980), “The new Political History in the 1970s.” In Kammen, M. (ed.), 

The Past Before Us, Ithaca: Cornell University Press. 

Boorstin, D. (1969), “The Businessman as an American Institution.” In A. Callow 
(ed.), American Urban History, New York: Oxford University Press. 

Brecher, J. (1972), Strike!, San Francisco, Straight Arrow Books. 

Bridges, A. (1982), “Plutocracy and Politics in Antebellum New York City.” Political 
Science Quarterly, spring 1982. 

Brown, K. (1942), “Stephen Girard, Promoter of the Second Bank of the United 
States.” Journal of Economic History II (November). 

Burch, P. (1972), The Managerial Revolution Reassessed, Lexington: Lexington 

Burch, P. (1973), “The NAM as an Interest Group.” Politics And Society 4 (fall). 

Burch, P. (1979), Unpublished manuscript on the core firms in the CED. 

Burch, P. (1980), Elites in American History, Vol. Ill, New York: Holmes & Meier. 

Burch, P. (1981a), Elites in American History, Vol. I, New York: Holmes & Meier. 

Burch, P. (1981b), Elites in American History, Vol. II, New York: Homes & Meier. 

Burgess’ Railway Directory (1861), New York: Wilbur & Hastings 

Burnham, W. D. (1970), Critical Elections and the Mainsprings of American Politics, 
New York: Norton. 

Burnham, W. D. (1974), “Theory and Voting Research: Some Reflections on 
Converse’s ‘Change in the American Electorate.’” American Political Science 
Review 68 (Sept.). 

Burnham, W. D. (1981), “The System of 1896: An Analysis.” In Kleppner, P., et alia 
(eds.), The Evolution of American Electoral Systems , Westport, Ct.: Greenwood 

Campbell, A., Converse, P., Miller, W., Stokes, D. (1960), The American Voter, New 
York: Wiley. 

Chandler, A. (1954), “Patterns of American Railroad Finance, 1830-50.” Business 
History Review XXVIII. 

Chandler, A. (1977), The Visible Hand, Cambridge: Harvard University Press. 

Chandler, A. (1980), “Government Versus Business.” In Dunlop, J., (ed.), Business 
and Public Policy, Cambridge: Harvard University Press. 

Chase-Dunn, C. (1980), “The Development of Core Capitalism in the Ante-Bellum 
United States.” In Bergessen, A., ed., Studies in the Modern World System, New 
York: Academic Press. 

Clubb, J., Flanigan, W., Zingale, N. (1980), Partisan Realignment, Beverly Hills: Sage. 

Coben, S. (1959), “Northeastern Business and Radical Reconstruction.” Mississippi 
Valley Historical Review XLVI (June). 

Collier, P. and Horowitz, D. (1976), The Rockefellers, New York: Holt, Rinehart, and 

Collins, R. (1981), Business Response to Keynes, New York: Columbia University 

Converse, P. (1972), “Change in the American Electorate.” In Campbell, A. and 
Converse, P. (eds.), The Human Meaning of Social Change, New York: Russell 

Converse, P. (1974), “Comments on Burnham’s ‘Theory and Voting Research.’” 
American Political Science Review 68 (Sept.) 

Corliss, C. (1950), Mam Line of Mid-America: The Story of the Illinois Central, New 
York: Creative Age Press. 

Crapol, E., and Schonberger, H. (1972), “The Shift to Global Expansion, 1865- 
1900.” In Williams, W. A. (ed.), From Colony to Empire, New York: Wiley. 

Cremin, L. (1980), American Education, New York, Harper. 

Dankert, C., Mann, F., Northrup, H. (1965), Hours of Work, New York: Harper. 

David, P., Solar, P. (1977), “A Bicentenary Contribution to the History of the Cost of 
Living in America.” In Research in Economic History, Vol. II. 

Debouzy, M. (1972), Le capitalisme sauvage aux Etats-Unis 1860-1900, Paris: 
Editions du Seuil. 

Dinkin, R. (1977), Voting in Provincial Elections, Westport, Ct.: Greenwood Press. 

Dodd, W. (1911), “The Fight for the Northwest, 1860.” American Historical Review 
XVI (July). 

Dorf, P. (1952), The Builder, Ezra Cornell, New York: Macmillan. 

Downs, A. (1957a), An Economic Theory of Democracy, New York: Harper. 

Downs, A. (1957b), “An Economic Theory of Political Action in a Democracy.” 
Journal of Political Economy LXV, No. 1. 

Draughton, R. (1966), “George Smith Houston and Southern Unity, 1846-1849.” 
Alabama Review (July). 

DuBoff, R. and Herman, E. (1980), “Alfred Chandler’s New Business History: A 
Review.” Politics and Society X, No. 1. 

Edelstein, T. (1968), Strange Enthusiasm: Thomas Wentworth Higginson, New 
Haven, Ct.: Yale University Press. 

Edwards, R. (1979), Contested Terrain, New York: Basic Books. 

Eiteman, W. (1930), “The Rise and Decline of Orthodox Tariff Propaganda,” 
Quarterly Journal of Economics 45 (November). 

Erie, S. (1980), “Two Faces of Ethnic Power.” Polity 13 (Winter). 

Evans, J. (1981), “USA.” In Lovenduski, J. and Hills, J. (eds.), The Politics of the 
Second Electorate, London: Routledge. 

Ferguson, T. (1980), “Von Versailles zum New Deal.” In Amerika: Tranm und 

Depression 1920/40, Catalogue essay for the Neue Gesellschaft fur Bildende Kunst 
Exhibit of American Art, Berlin and Hamburg, 1980. 

Ferguson, T. (1983), “The System of ’96: A Reconsideration,” manuscript. 

Ferguson, T. (1984), “From ‘Normalcy’ to New Deal: Industrial Structure, Party 
Competition, and American Public Policy in the Great Depression.” International 
Organization (winter). 

Ferguson, T. (1986), “Elites and Elections; Or What Have They Done to You Lately? 
Toward an Investment Theory of Political Parties.” In Ginsberg, B. and Stone, A. 
(eds.), Do Elections Matter ? (1st. ed.) pp. 164-188, Armonk, NY: Sharpe. 

Ferguson, T. (n.d.), Critical Realignment: The Fall of the House of Morgan and the 
Origins of the New Deal, New York: Oxford University Press, forthcoming. 

Ferguson, T. and Rogers, J. (1980), “Labor Law Reform and Its Enemies.” In Green, 
M. and Massie, G. (eds.), The Big Business Reader (1st ed.), New York: Pilgrim 

Ferguson, T., and Rogers, J. (1981). “The Reagan Victory.” In Ferguson, T. and 
Rogers, J. (eds.), The Hidden Election, New York: Pantheon. 

Fiorina, M. (1977), Congress: Keystone of the Washington Establishment, New 
Haven, Ct.: Yale University Press. 

Foner, P. (1941), Business and Slavery, Chapel Hill, N.C.: University of North 
Carolina Press. 

Forbes, S. F. (1900), Letters and Recollections of John Murray Forbes, Boston and 
New York: Houghton Mifflin. 

Formisano, R. (1981), “Federalists and Republicans: Parties, Yes—Systems, No.” In 
Kleppner, P., et ah, (eds.), The Evolution of American Electoral Systems, Westport, 
Ct.: Greenwood Press. 

Frescia, G. (1982), “Contradictions of the American Party System: An Explanation of 
Party Reorganization During the Nineteenth Century,” Ph.D. Thesis, University of 

Frohlich, N., Oppenheimer, J., Young, O. (1971), Political Leadership and Collective 
Goals, Princeton: Princeton University Press. 

Fusfeld, D. (1980), The Rise and Repression of Radical Labor U.S.A., Chicago: 
Charles H. Kerr. 

Gattell, F. (1966), “Sober Second Thoughts on Van Buren, The Albany Regency, And 
the Wall Street Conspiracy.” Journal of American History LIII (June). 

Ginsberg, B. (1982), The Consequences of Consent, Reading, Mass.: Addison Wesley. 

Goldstein, R. (1978), Political Repression in Modern America, New York: 


Goodwyn, L. (1976), Democratic Promise, New York: Oxford University Press. 

Gordon, D., Edwards, R., and Reich, M. (1982), Segmented Work, Divided Workers, 
New York: Cambridge University Press. 

Goulden, J. (1971), The Money Givers, New York: Random House. 

Gramsci, A. (1971), Selections From the Prison Notebooks, (eds.), Hoare, Q. and 
Smith, G., New York: International Publishers. 

Griffin, J. (1939), Strikes, New York: Columbia University Press. 

Haeger, J. (1981), The Investment Frontier, Albany, N.Y.: State University of New 

Hammond, B. (1946), “Schlesinger’s Age of Jackson.” Journal of Economic History 

VI (May). 

Hammond, B. (1957), Banks and Politics in America, Princeton, N.J.: Princeton 
University Press. 

Harlow, R. (1935), “The Rise and Fall of the Kansas Aid Movement.” American 
Historical Review XLI (October). 

Herman E. (1981), Corporate Control, Corporate Power, New York: Cambridge 
University Press. 

Johnson, P. (1979), A Shopkeeper’s Millenium, Berkeley, Calif.: University of 
California Press. 

Jones, G. S. (1970), “The Specificity of U.S. Imperialism.” New Left Review 60 

Josephson, M. (1963), The Politicos, New York: Harcourt. 

Kalt, J. (1981), The Economics and Politics of Oil Price Regulation, Cambridge, 
Mass.: M.I.T. Press. 

Kelley, S., and Mirer, T. (1974), “The Simple Act of Voting.” American Political 
Science Review LXVIII (June). 

Key, V. (1959), “Secular Realignment and the Party System.” Journal of Politics 21 

Kindleberger, C. (1977), “U.S. Foreign Economic Policy, 1776-1976.” Foreign Affairs 

Kolko, G. (1963), The Triumph of Conservatism, New York: Quadrangle. 

Kolko, G. (1965), Railroads and Regulation, Princeton, N.J.: Princeton University 

Kotz, D. (1979), “Bank Control of Large Corporations in the United States,” Ph.D. 
Thesis, University of California, Berkeley. 

Kousser, J. (1980), “History QUASSHED, Quantitative Social Scientific History in 
Perspective.” American Behavorial Scientist XXIII (July/August). 

Kuznets, S., Miller, A., and Easterlin, R. (1960), Population Redistribution and 
Economic Growth, Vol. II, Analyses of Economic Change, Philadalphia, Pa.: 
American Philosophical Society. 

La Feber, W. (1972), “Foreign Policies of a New Nation.” In F. W. A. Williams (ed.), 
From Colony to Empire, New York: Wiley. 

LaFeber, W. (1993), Inevitable Revolutions: The United States in Central America, 
New York: Norton. 

Lebergott, S. (1972), “The American Labor Force.” In Davis, et al. (eds.), American 
Economic Growth, New York: Harper. 

Lee, S. and Passed, P. (1979), A Neiv Economic Vieiv of American History, New 
York: Norton. 

Lichtman, A. (1976), “Critical Election Theory and the Reality of American 
Presidential Politics, 1916-40.” American Historical Review 81 (April). 

Lichtman, A. (1980), Prejudice and the Old Politics, Chapel Hill, N.C.: University of 
North Carolina Press. 

Lichtman, A. (1982), “Critical Elections in Historical Perspective.” California Institute 
of Technology Social Science Working Paper #420. 

Lindblom, C. (1977), Politics and Markets, New York: Basic Books. 

Lows Railroad Directory (1858), New York: Wynkoop, Hallenbeck & Thomas. 

Lundberg, F. (1937), America’s 60 Families, New York: Vanguard. 

Main, J. (1961), The Anti-Federalists, Chapel Hill, N.C.: University of North Carolina 

McCormick, R. (1960), “New Perspectives on Jacksonian Politics,” American 
Historical Review, LXV (January). 

Mills, C. (1894), “The Relief of the Unemployed in the United States During the 
Winter of 1893-94.” Journal of Social Science XXXII (November). 

Montgomery, D. (1979), Workers Control in America , New York: Cambridge 
University Press. 

Mowry, G. (1946), Theodore Roosevelt and the Progressive Movement, Madison, 
Wise.: University of Wisconsin Press. 

Nugent, W. (1967), The Money Question During Reconstruction, New York: Norton. 

O’Connor, T. (1968), Lords of the Loom, New York: Scribners. 

Offe, C., and Wiesenthal, H. (1980), “Two Logics of Collective Action: Theoretical 
Notes on Social Class and Organizational Form.” Political Power and Social 
Theory, Vol. 1. 

Olson, M. (1971), The Logic of Collective Action, Cambridge: Harvard University 

Overacker, L. (1932). Money In Elections, New York: Macmillan. 

Peterson, F. (1935), “Unemployment Relief.” In Commons, J. (ed.), History of Labor 
in the United States, Vol. Ill, New York: Macmillan. 

Pincus, J. (1977), Pressure Groups and Politics in Antebellum Tariffs, New York: 
Columbia University Press. 

Pittman, R. (1977), “Market Structure and Campaign Contributions.” Public Choice 
32 (Fall). 

Polakoff, K. (1981), Political Parties in American History, New York: Wiley. 

Popkin, S., Gorman, J., Phillips, C., and Smith, J. (1976), “Comment: What Have You 
Done for Me Lately? Toward an Investment Theory of Voting.” American Political 
Science Review 68 (Sept.). 

Potter, D. (1976), The Impending Crisis 1848-61, New York: Harper. 

Preyer, N. (1959), “Southern Support of the Tariff of 1816: A Reappraisal.” Journal 
of Southern History (August). 

National Cyclopedia of American Biography, Various vols. 

Ratner, R. (1980), “The Social Meaning of Industrialization in the United States.” 
Social Problems 27 (April). 

Ratner, S. (1967), Taxation and American Democracy, New York: Wiley. 

Reid, S. (1976), The New Industrial Order, New York, McGraw Hill. 

Remini, R. (1967), Andreiv Jackson And The Bank War, New York, Norton. 

Rezeck, S. (1933), “The Depression of 1819-22, A Social History.” American 
Historical Review 39 (October). 

Rezeck, S. (1942), “The Influence of Depression upon American Opinion.” Economic 
History II (May). 

Robertson, R., and Walton, G. (1979), History of the American Economy, New York: 

Robinson, J. (1971), Economic Heresies, New York: Basic Books. 

Roemer, J. (1978), “Neoclassicism, Marxism, and Collective Action.” Journal of 
Economic Issues 12 (March). 

Roy, W. (1981), “From Electoral to Bureaucratic Politics.” Political Power and Social 
Theory, Vol. 2, Greenwich, Ct.: JAI Press. 

Rusk, J. (1970), “The Effect of the Australian Ballot Reform on Split Ticket Voting: 
1876-1908.” American Political Science Review 64 (December). 

Rusk, J. (1974), “Comment: The American Political Universe: Speculation and 
Evidence.” American Political Science Review 68 (September). 

Russel, D. (1972), “The Major Political Issues of the Jacksonian Period and the 
Development of Party Loyalty in Congress, 1830-1840.” Transactions of the 
American Philosophical Society, LXII (May). 

Russel, R. (1948), Improvement of Communication with the Pacific Coast as an Issue 
in American Politics, Cedar Rapids, Mich.: Torch Press. 

Schirmer, D. (1972), Republic or Empire, Cambridge: Schenkman. 

Schlesinger, A., Jr. (1945), The Age of Jackson, Boston: Little, Brown. 

Schwartz, M. (1976), Radical Protest and Social Structure, New York: Academic 

Shade, W. (1981), “Political Pluralism and Party Development.” In Kleppner, P. et alia 
(eds.), The Evolution of American Electoral Systems, Westport, Ct.: Greenwood 

Shefter, M. (1976), “The Emergence of the Political Machine.” In Hawley, W. and 
Lipsky, M. (eds.), Theoretical Perspectives on Urban Politics, Englewood Cliffs: 
Prentice Hall. 

Shefter, M. (1978), “Party, Bureaucracy, and Political Change in the United States.” In 
Maisel, L. and Cooper, J. (eds.). Political Parties, Beverly Hills: Sage. 

Sherrill, R. (1981), “The Nylon Curtain Affair: The Book That DuPont Hated.” The 
Nation, Feb. 14, 1981. 

Singleton, G. (1975), “Fundamentalism and Urbanization.” In Schore, L. (ed.), The 
New Urban History, Princeton, N.J.: Princeton University Press. 

Sobel, R. (1977), The Fallen Colossus, New York: Weybright and Talley. 

Sorin, G. (1970), The New York Abolitionists, Westport, Conn: Greenwood Press. 

Stokes, D. (1966), “Spatial Models of Party Competition.” In Campbell, A., Converse, 
P., Miller, W., and Stokes, D. (eds.), Elections and the Political Order, New York. 

Stover, J. (1975), History of the Illinois Central Railroad, New York: Macmillan. 

Sumner, H. (1936), “Citizenship.” In Commons, J., et al. (eds.), History of Tabor in 
the United States, New York: Macmillan. 

Sunderland, E. (1955), Abraham Lincoln and the Illinois Central Railroad, New York: 
Privately Printed. 

Taussig, F. (1964), The Tariff History of the United States, New York: Capricorn 

Thayer, G. (1973), Who Shakes the Money Tree, New York: Simon and Schuster. 

Trimble, W. (1919), “Diverging Tendencies in the New York Democracy in the Period 
of the Locofocos.” American Historical Review 24 (April). 

United States Railway Directory, 1856, New York: Homans. 

Useem, M. (1980), “Which Business Leaders Help Govern?” Insurgent Sociologist, IX 

Van Alstyne, R. (1972), “The American Empire Makes Its Bow on the World Stage, 
1803-1845.” In Williams, W. A. (ed.), From Colony to Empire, New York: Wiley. 

Walsh, V. (1970), Introduction to Contemporary Microeconomics, New York: 

Weinstein, J. (1968), The Corporate Ideal in the Liberal State, Boston: Beacon Press. 

Welter, R. (1960), “The Frontier West as an Image of American Society.” Mississippi 
Valley Historical Review (March). 

Wiebe, R. (1962), Businessmen and Reform, Chicago: Quadrangle. 

Williamson, J. (1981), “Economics and Politics: Voting Behavior in Kansas.” 
Explorations in Economic History (July). 

Williamson, J., and Lindert, P. (1980), American Inequality, New York: Academic 

Yarwood, D. (1967), “Legislative Persistence.” Midwest Journal of Political Science 

Yearly, C. (1970), The Money Machines, Albany, N.Y.: State University of New York. 

Zeitlin, M., and Norwich, S. (1979), “Management Control, Exploitation, and Profit 

Maximization in the Large Corporations.” Research in Political Economy , Vol. 2, 
Greenwich, Ct: JAI Press. 

Zilg, G. (1976), DuPont , Englewood Cliffs, N.J.: Prentice-Hall. 


Studies in the Logic of Money-Driven Political 


From ‘Normalcy’ to New Deal: Industrial 
Structure, Party Competition, and American Public 
Policy in the Great Depression 

IN OCTOBER 1929, only weeks after Yale economist (and 
investment trust director) Irving Fisher publicly announced that 
“stock prices have reached what looks like a permanently high 
plateau,” and virtually on the day that J. P. Morgan & Co. partner 
Thomas W. Lamont reassured President Herbert Hoover that “there 
is nothing in the present situation to suggest that the normal 
economic forces . . . are not still operative and adequate,” the New 
York Stock Exchange crashed.- Over the next few months the market 
continued dropping and a general economic decline took hold.- As 
sales plummeted, industry after industry laid off workers and cut 
wages. Farm and commodity prices tumbled, outpacing price declines 
in other parts of the economy. A tidal wave of bankruptcies engulfed 
businessmen, farmers, and a middle class that had only recently 
awakened to the joys of installment buying.- 

While the major media, leading politicians, and important 
businessmen resonantly reaffirmed capitalism’s inherently self- 
correcting tendency, havoc spread around the world. By 1932, the 
situation had become desperate. Many currencies were floating and 
international finance had virtually collapsed. In part because of the 
catastrophic fall in income and in part from mushrooming tendencies 
toward consciously pursued policies of trade restriction, world trade 
had shrunk to a fraction of its previous level. In many countries one- 
fifth or more of the workforce was idle. Homeless, often starving, 
people camped out in parks and fields, while only the virtual collapse 
of real-estate markets in many districts checked a mammoth 
liquidation of homes and farms by banks and insurance companies.- 
As a new spiritus diaboli, Fascism, joined the old specter, 
Communism, to haunt Europe and the world, conflicts multiplied 
both within and between nation states. 

In this desperate situation, with regimes changing and governments 
falling, a miracle seemed to occur in the United States, the country 

that, among all the major powers in the capitalist world economy, 
had perhaps been hit hardest. Taking office at the moment of the 
greatest financial collapse of the nation’s history, President Franklin 
D. Roosevelt initiated a dazzling burst of government actions 
designed to square the circle that was baffling governments 
elsewhere: how to enact major social reforms while preserving both 
democracy and capitalism. In a hundred days his administration 
implemented a series of emergency relief bills for the unemployed; an 
Agricultural Adjustment Act for farmers; a bill (the Glass-Steagall 
Act, also sometimes referred to as the Banking Act of 1933) to 
“reform” the banking structure; a Securities Act to reform the stock 
exchange; and the National Industrial Recovery Act, which in effect 
legalized cartels in American industry.- Roosevelt suspended the 
convertibility of the dollar into gold, abandoned the gold standard, 
and enacted legislation to promote American exports. He also 
presided over a noisy public investigation of the most famous 
banking house in the world: J. P. Morgan & Co. 

For a while this “first New Deal” package of policies brought some 
relief, but sustained recovery failed to arrive and class conflict 
intensified. Two years later, Roosevelt scored an even more dramatic 
series of triumphs that consolidated his position as the guardian of all 
the millions, both people and fortunes. A second period of whirlwind 
legislative activity in 1935 produced the most important social 
legislation in American history—the Social Security and Wagner acts 
—as well as measures to break up public-utility holding companies 
and to fix the price of oil. The president also turned dramatically 
away from his earlier economic nationalism. He entered into 
agreements with Britain and France informally to stabilize the dollar 
against their currencies and began vigorously to implement earlier 
legislation that empowered Secretary of State Cordell Hull to 
negotiate a series of treaties reducing U.S. tariff rates. - 

After winning one of the most bitterly contested elections in 
American history by a landslide (and giving the coup de grace to the 
old Republican-dominated System of 1896), Roosevelt consolidated 
the position of the Democrats as the new majority party of the United 
States. He passed additional social welfare legislation and pressured 
the Supreme Court to accept his reforms. Faced with another steep 
downturn in 1937, the Roosevelt team confirmed its new economic 
course. Rejecting proposals to revive the National Recovery 
Administration (NRA) and again devalue the dollar, it adopted an 

experimental program of conscious “pump priming,” which used 
government spending to prop up the economy in a way that 
foreshadowed the Keynesian policies of demand management widely 
adopted by Western economies after 1945. This was the first time 
this had ever been attempted—unless one accepts the Swedish 
example, which was virtually contemporaneous.- 

Roosevelt and his successive New Deals have exercised a magnetic 
attraction on subsequent political analysts. Reams of commentary 
have sought to elucidate what the New Deal was and why it evolved 
as it did. But while the debate has raged for over forty years, little 
consensus exists about how best to explain what happened. 

Many analysts, including most of those whose major works shaped 
the American social sciences and historiography of the last 
generation, have always been convinced that the decisive factor in the 
shaping of the New Deal was Franklin D. Roosevelt himself.- They 
hail his sagacity in fashioning his epoch-making domestic reforms. 
They honor his statecraft in leading the United States away from 
isolationism and toward Atlantic alliance. And they celebrate the 
charisma he displayed in recruiting millions of previously marginal 
workers, blacks, and intellectuals into his great crusade to limit 
permanently the power of business in American life. 

Several rival accounts now compete with this interpretation. As 
some radical historians pose the problem, only Roosevelt and a 
handful of advisers were farsighted enough to grasp what was 
required to save capitalism from itself.- Accordingly, Roosevelt 
engineered sweeping attacks on big business for the sake of big 
business’s own long-run best interest. (A variation on this theme 
credits the administration’s aspirations toward reform but points to 
the structural constraints capitalism imposes on any government as 
the explanation for the New Deal’s conservative outcome.) 

Another recent point of view explains the New Deal by pointing to 
the consolidation and expansion of bureaucratic institutions. It 
deemphasizes Roosevelt as a personality, along with the period’s 
exciting mass politics. Instead, historians like Ellis Hawley single out 
as the hallmarks of the New Deal the role of professionally certified 
experts and the advance of organization and hierarchical control. 

Some of these arguments occasionally come close to the final 
current of contemporary New Deal interpretation. This focuses 
sharply on concrete interactions between polity and economy (rather 

than bureaucracy per se) in defining the outcome of the New Deal. 
Notable here are the (mostly German) theorists of “organized 
capitalism,” several different versions of Marxist analysis, right-wing 
libertarian analysts who treat the New Deal as an attempt by big 
business to institutionalize the corporate state, and Gabriel Kolko’s 
theory of “political capitalism.”— 

These newer approaches provide telling criticisms of traditional 
analyses of the New Deal. At the same time, however, they often 
create fresh difficulties. “Organized capitalism,” “political 
capitalism,” or the libertarian “corporate state” analyses, for 
example, are illuminating with respect to the universal price-fixing 
schemes of the NRA. But the half-life of the NRA was short even by 
the admittedly unstable standards of American politics. The historic 
turn toward free trade that was so spectacularly a part of the later 
New Deal is scarcely compatible with claims that the New Deal 
institutionalized the collective power of big business as a whole, and 
it is perhaps unsurprising that most of this literature hurries over 
foreign economic policy. Nor are more than token efforts usually 
made to explain in detail why the New Deal arrived in its classic 
post-1935 form only after moving through stages that often seemed 
to caricature the celebrated observation that history proceeds not 
along straight lines but in spirals. It was, after all, a period in which 
the future patron saint of American internationalism not only raised 
more tariffs than he lowered but also openly mocked exchange-rate 
stability and the gold standard, promoted cartelization, and endorsed 
inflation.— Similarly, theorists who treat the New Deal chiefly as the 
bureaucratic design of credentialed administrators and professionals 
not only ignore the significance of this belated opening to 
international trade in the world economy, but they also do less than 
full justice to the dramatic business mobilization and epic class 
conflicts of the period. 

Nor do any of these accounts provide a credible analysis of the 
Democratic Party of the era. Then, as now, the Democratic Party fits 
badly into the boxes provided by conventional political science. On 
the one hand, it is perfectly obvious that a tie to at least part of 
organized labor provides an important element of the party’s identity. 
But, on the other, it is equally manifest that no amount of cooptation 
accounts for the party’s continuing collateral affiliation with such 
prominent businessmen as, for example, Averell Harriman. Why, if 
the Democrats truly constituted a mass labor party, was the outcome 

of the New Deal not more congruent with the traditional labor party 
politics of Great Britain and Germany? And, if the Democrats were 
not a labor party, then what force inside it was powerful enough to 
contain the Congress of Industrial Organizations (CIO) and 
simultaneously launch a sweeping attack on major industrial 
interests?— These analyses also slip past the biggest puzzle that the 
New Deal poses. They offer few clues as to why some countries with 
militant labor movements and charismatic political leaders in the 
Depression needed a “New Order” instead of a New Deal to control 
their workforce. 

Nor has theory, especially economic theory, figured significantly in 
most of these studies. The centrality of issues like the money supply, 
international finance, and macroeconomic policy has failed to come 
into focus. Important theoretical discussions (like debates over 
Federal Reserve policy during the period) echo only faintly, or not at 
all, in more general writing, while neoclassically inclined economists 
have thus far ignored all aspects of the New Deal that create 
difficulties for their particular theoretical viewpoint.— 

In this chapter I contend that a clear view of the New Deal’s world 
historical uniqueness and significance comes only when one breaks 
with most of the commentaries of the last thirty years, goes back to 
primary sources, and attempts to analyze the New Deal as a whole in 
the light of explicit theories about industrial structure, party 
competition, and public policy. Then what stands out is the novel 
type of political coalition that Roosevelt built. At the center of this 
coalition, however, are not the workers, blacks, and poor who have 
preoccupied liberal commentators, but something else: a new 
“historical bloc” (in Gramsci’s phrase) of capital-intensive industries, 
investment banks, and internationally oriented commercial banks. 

This bloc constitutes the basis of the New Deal’s great and, in 
world history, utterly unique achievement: its ability to accommodate 
millions of mobilized workers amidst world depression. Because 
capital-intensive firms use relatively less direct human labor (and that 
often professionalized and elaborately trained), they were less 
threatened by labor turbulence. They had the space and the resources 
to envelop, rather than confront, their workforce. In addition, with 
the momentous exception of the chemical industry, these capital- 
intensive firms were world as well as domestic leaders in their 
industries. Consequently, they stood to gain from global free trade. 
They could, and did, ally with important international financiers, 

whose own miniscule workforce presented few sources of tension and 
who had for over a decade supported a more broadly international 
foreign policy and the lowering of traditionally high American tariffs. 

In the first part of this chapter I develop a formal theory of 
industrial partisan preference as the joint consequence of class 
conflict and the differential impact of the world economy on 
particular businesses. I also relate the theory to the V. O. Key-Waiter 
Dean Burnham-(Michigan) Survey Research Center (SRC) discussions 
of party systems and critical realignments, arguing that 
transformations of elite industrial coalitions lie behind the 
phenomena voting analysts have for so long tried to analyze. This 
section also presents an explicit account of the dynamics of the 
transition from the System of 1896 to the New Deal. 

In the second part I outline the major elements of the coalition that 
triumphantly came together during and after Roosevelt’s Second New 
Deal—the coalition that, in its successive mutations, dominated 
American politics until Jimmy Carter. Employing the first part’s 
theoretical framework, I sketch the systematic, patterned 
disintegration of the System of ’96 and the simultaneous emergence 
of another New Deal bloc, whose interests and ideology shaped what 
can conveniently be termed “multinational liberalism.” 


My principle argument divides conveniently into two subordinate 
parts. The first, what might be called the “static theory of industrial 
partisan preference,” builds on recent work by James Kurth, Peter 
Gourevitch, and Douglas Hibbs, among others.— Introducing first 
the “labor constraint” and then issues in international political 
economy, I present an abstract, basic model of partisan choice by 
particular industries and firms exhibiting differential sensitivity to 
class conflict and foreign economic policy issues. Following two 
earlier articles, I show how the policy—and hence, partisan—choices 
of these firms define the durable party systems extensively discussed 
by analysts of mass voting behavior.^ I also demonstrate a method 
for the measurement and graphical analysis of these political 

The second spells out the dynamic implications of the static model. 
It investigates how major changes in the level of national income (i.e., 
long booms or major depressions) affect party systems and political 

coalitions. Major spurts of economic growth and protracted 
economic decline, runs the argument, destabilize political coalitions 
in quite specific, predictable ways. By tracing how steadily rising or 
falling income affects a given industrial structure, one glimpses the 
logic by which earlier coalitions, built around increasingly 
obsolescent combinations of trade and labor, decay, while new 
coalitions arise. One also comes to understand how booms and 
depressions characteristically generate brief but intense conflicts over 
certain issues, notably money and finance, which can enormously 
complicate transitions from one party system to another. By 
examining in detail how such forces affect the basic model of the 
System of ’96’s partisan cleavages, I provide an account of the 
dynamics of the New Deal—one that explains not only the long-run 
evolution of the System of ’96 into the New Deal but also the 
complex sequence of apparently contradictory policy changes 
through which the New Deal evolved before it assumed its classic 
Second New Deal form. 

The Static Theory 

The basic argument connecting industrial structure to political parties 
and public policy is uncomplicated. It follows from two widely 
acknowledged facts. The first can be summarized as the ubiquitous 
and enduring presence of social class conflicts within the electoral 
systems of virtually all countries permitting at least moderately free 
elections and modestly competitive political parties. As one careful 
quantitative study of the cross-national evidence recently observed, 
“Although the importance of socioeconomic status as a basis of 
electoral cleavage varies substantially across party systems, the mass 
constituencies of political parties in most advanced industrial 
societies are distinguished to a significant extent by class, income, 
and related socioeconomic characteristics.”— The second merely 
highlights the policy consequences of the first: the actual influence of 
labor and the working classes on public policy varies substantially 
over time, both within and across countries.— 

Thus, as a long and distinguished tradition of social theory 
emphasizes and evidence from some, but not all, countries suggests, it 
might well be the case that labor’s ability to dominate a political 
party—and, when that party is in power, government policy—is such 
as to threaten gravely the institution of private business itself or at 

least to strike deeply at the prerogatives and earnings of all 
employers. In these instances, other things being equal, the whole 
business community will rush into opposition and establish one or 
more political parties of its own. 

But if labor’s social position is weak, if it cannot organize its own 
political party, what happens? Most social scientists and historians 
recognize that in such circumstances labor enters into a coalition, 
appearing as one among several interest groups within a party or 
government. Most do this implicitly, in the course of narratives or 
analyses that record the historical facts. A few substantially improve 
upon this practice and try deliberately to spell out what the artless 
language of modern game theory often refers to as the “payoffs” to 
each partner in particular political coalitions in various countries at 
different times.— 

Viewed in the light of industrial structure, however, a more general 
logic to political coalitions involving labor becomes plain. For what is 
at stake in these coalitions is the exact “price” that businesses seeking 
to coalesce to advance their own ends must “pay” to obtain support 
from the workforce. If one could specify in detail which firms or 
industries could most easily afford this price, one would have 
developed a predictive model of party competition. Such a 
perspective might cast light on the strange character of the 
Democratic Party in the United States and, perhaps, some of the 
tamer social democratic parties in postwar Europe. 

Such an assessment of abilities to “afford the price” is not beyond 
the reach of current interpretative capability. Two polar cases make 
the essential points transparent. Consider the hypothetical case of a 
business that employed absolutely no labor, one that relied entirely 
on robots. Such an enterprise would have an exceedingly remote 
interest in most of the issues historically disputed between business 
and labor.— Other things being equal, it could quite easily afford to 
support what looked to the unaided and untheoretical eye like a 
“labor” party, or at least practice consistent bipartisanship. By 
contrast, industries that rely on masses of un- or semiskilled labor, 
for whom national labor issues are highly salient, would enjoy far 
less freedom of maneuver. Unlike the fully automated firm, they 
could not afford higher social insurance, could not pay higher wages, 
could not accept a union. Where the workforce was already 
organized, they could not resist the pressure to attempt to undermine 
it. And a legislated minimum wage would usually constitute a direct 

threat to them. In Europe, such firms would most likely bulwark a 
conservative party; in America, they would have no alternative but to 
become rockribbed Republicans. 

Of course, some level of class conflict always exists beyond which 
all industries retreat to a single business party (a case more common 
in Europe than in the United States). But short of that point, different 
industries featuring differential sensitivities to what can be termed the 
“labor constraint” can seize the opportunity to govern through the 
votes of their laborers. 

The rule of “minimal accounts of labor” obviously needs to be 
modified in many cases.— But, as the allusion to robot-run factories 
suggests, in general a business that relies less on workers than it does 
on, for example, capital should properly be considered less “labor- 
sensitive” than one that does the reverse. Accordingly, industry 
statistics for variables like “wages as a percent of value added” 
provide rough quantitative estimates of an industry’s ability to afford 
a coalition with labor and make it quite easy to order industries and 
firms along this dimension. 

The firms least likely to undertake such an effort (and thus most 
likely to support the “business party”) are, obviously, low-wage 
labor-intensive firms like those commonly found in the textile 
industry. Thereafter, using 1929 estimates from the Census of 
Manufacturers of wages as a percentage of value added, we can 

textiles (cotton goods) 52 percent 

steel and iron 47 

boots and shoes 44 

automobiles 41 

copper 38 

meat packing 37 

rubber (tires and inner tubes) 37 percent 
agricultural implements 36 

electrical machinery 34 

chemicals 23 

oil (petroleum refining) 22 

tobacco (chewing and smoking) 8 

Then come two industries—commercial banking and investment 
banking—whose labor costs measured in this manner are almost 
irrelevant since their costs are overwhelmingly the costs of borrowed 
money (paid to depositors or whomever); and, finally, real estate 
(local only).— 

Combining an industry’s “labor sensitivity” with the known facts 
of class conflict yields a simple, comparative static model of 
industrial structure and party competition, which can summarized 
visually (see figure 2.1 ). On the horizontal axis runs a continuous 
variable representing a proxy (which can be as complex as the analyst 
desires) for the degree of class conflict, or its equivalent, the balance 
of power between labor and capital actually struck in terms of public 
policy over some stretch of time.— On the vertical axis is an estimate 
of an industry’s sensitivity to the labor constraint (as derived from 
the above listing). In a simple model, where taxes or international 
issues do not induce complications, this establishes the value of a 
probability function Q, the “exit point” at which labor’s ability to 
define public policy in its interest makes it useless for the industry to 
extend any support to the “labor” party.— At successively higher 
levels of class conflict (equivalent to a move out along the horizontal 
axis), more and more industries drop out of the labor party, until at 
length none are left and the system passes from an American 
“pluralist” type to a classic, highly polarized “European” party 


FIGURE 2.1. The Labor Constraint: Industries Vary Widely in Their Sensitivity to Labor 

Formidable problems naturally stand in the way of attempts to 
apply a scheme such as this to any event as complex as the New Deal. 
For example, empirically ascertaining which parties or policies a firm 
or an industry is supporting at a particular point can be very 
laborious. - It is also clear that some industries can afford to extend 
at least some support to both parties (though both logic and history 
suggest that this support will not be offered equally). But already 
some clearly testable propositions can be generated that have obvious 
relevance to the New Deal. For example, one would not expect that a 
relatively labor-intensive economy, dominated by textiles, steel, and 
shoes, would find it easy to accommodate mass movements for 
unionization. By contrast, if it turned out that in the decade 
immediately preceding the New Deal the characteristic modern 
American form of capital-intensive enterprise, the giant integrated, 
multinational petroleum company, ascended to the pinnacle of the 
American industrial structure, an important clue to the historical 
uniqueness of the New Deal has probably been located. Similar 
reasoning might explain why other countries, like Germany, seemed 
able to transplant the New Deal in the 1950s but not in the 1930s, or 
why deradicalized labor parties in Europe were often able to 

cooperate more closely with big business after World War II than 
before it. 

But if characterizing parties—and, by extension, party systems— 
according to their labor sensitivity illuminates the politics of 
advanced capitalist countries, it is by itself obviously not enough. 
Class conflict, after all, scarcely exhausts the sources of political 
turbulence. Accordingly, the single-dimension, simple class-conflict 
model needs to be supplemented if it is to have much predictive 
value. In principle, the number of complicating supplementary issues 
could be infinite, dashing all hopes for parsimonious explanation and 
making analyses impossibly difficult. 

During most of the period that concerns me here, comparatively 
few issues that were not broadly labor-related were potent enough to 
stir major, persisting conflicts within the generally laissez-faire 
American political system.— Accordingly, while references to other 
dimensions are sometimes necessary for detailed discussion of 
particular cases and are required for an analysis of the actual 
transition from the System of ’96 to the New Deal, the most general 
(or “normal”) case needs but a single extra dimension—one that 
summarizes the competitive positions of various firms and industries 
within the world economy. Thus I divide firms into 
“internationalists,” whose strong position vis-a-vis international 
competitors leads them to champion an open world economy with 
minimal government interventions that would hinder the “free” 
market-determined flow of goods and capital; and “nationalists,” 
whose weakness in the face of foreign rivals drives them to embrace 
high tariffs, quotas, and other forms of government intervention to 
protect themselves (see figure 2.2 ). — Combining this line of cleavage 
with the class-conflict dimension yields an analysis in which each 
firm or industry as a whole can be located at two coordinates: one 
summarizes the characteristics of its production process with respect 
to the workforce; the other, its situation in the world economy. 

A party system as a whole can now be characterized in these terms. 
If most elements of the industrial structure cluster tightly together in 
one or another “quadrant” of figure 2.3 . political conflict within the 
system is likely to be muted.— Assuming that the workforce can be 
contained, the conditions are satisfied for the stable hegemony of a 
particular historical bloc. In sharp contrast, should class conflict and 
the world economy combine to scatter large firms and major 
industries among all the quadrants, the party system would be 

incoherent. Similarly, figure 2.3 ’s sharp division between two 
diagonally opposed quadrants yields a rather stable, fairly well- 
balanced, two-party system in which the less labor-intensive bloc, by 
allying with labor, might well achieve hegemony. 






























FIGURE 2.2. International Competitive Status of Selected U.S. Firms and Industries in 1929 
and 1935 

Source: Based on M. Wilkins, The Maturing of Multinational Enterprise (Cambridge: 
Harvard University Press, 1974), and sources cited in note 27. 

Notes: In several cases notable intra-industry differences are not reflected here, especially in 
petroleum. There is no significance to the distance between categories, only to the ordering. 



FIGURE 2.3. Industrial Structure and Party Competition: A Stylized Two-Party Case 

From the Statics of Party Competition to the Dynamics of Party 

The account of partisan choice and party systems presented here is 
static in the sense that it applies to actions and events at a single 
moment in time. Yet, as the earlier allusion to the rise of the major 
oil companies during the Roaring Twenties suggests, the static theory 
can be extended to cover dynamic issues. It thereby renders possible a 
fresh explanation of the oft-debated and still not entirely resolved 
puzzles surrounding the timing and sequence of the major New Deal 
policy initiatives. 

Perhaps the most convenient way to begin is to refer again to figure 
2.3 . Instead of the diagonally opposing clusters of firms it shows, 
however, imagine the figure’s space as representing the American 

political system around 1900. In that case, nearly all the dots will 
cluster tightly in quadrant 2, indicating the power bloc defined by the 
almost monolithically Republican business community of that period, 
whose component firms were nearly all strongly protectionist and 

If the figure were drawn a quarter-century later it would exhibit 
substantial differences. In the interval, major cumulative changes in 
industrial structure have occurred. World War I and the boom of the 
1920s have spurred the mechanization of production. Large, science- 
based corporations have become far more prominent. The war has 
also transformed the United States from a net debtor to a net creditor 
in the world economy. Textiles have withered away in the Northeast, 
meat packing and steel have declined relative to oil, and so forth. 
Virtually all these developments affect the distribution of firms in 
regard to labor and trade policy, and thus, to some degree, transform 
the party system. In terms of the graphical analysis many dots have 
begun to migrate. New ones—representing firms in developing 
industries—have suddenly appeared in new places while some old 
dots, marking marginal firms in dying industries, have disappeared. 

In the United States after World War I, the analysis implies, a new 
bloc of big, capital-intensive firms that increasingly dominate the 
world market for their products is beginning to grow in quadrant 4, 
diagonally opposite the old System of ’96 bloc. It is obvious that such 
a party system is headed for trouble, with or without a major 
depression. As firms increasingly move into the other quadrant, the 
old bloc will clearly come under strain. As it disintegrates and the 
new bloc, which will dominate the next party system, is born, policy 
fights and transaction costs associated with public policy-making will 
rise. Political stalemates are likely to increase and the sense of a 
vacuum forming will probably spread, as traditional political 
alliances evaporate and surprising new ones emerge. 

The exact form the transition from one party system to another 
will take, however, depends critically on the level of national income. 
National income is important for two different reasons. First, over 
time it exercises what might be termed “direct effects” on the 
location of business firms on the two “primary” dimensions of labor 
and international economic policy. Second, and much less obviously, 
major fluctuations in the trend of national income roil the transition 
to a new party system by temporarily forcing certain characteristic 
kinds of new issues to the fore, issues that supplement or even 

momentarily replace labor and international economic policy as 
pivots for the system.— The nature of these “secondary” tensions 
(“secondary” in contrast to the “primary” issues of labor and trade, 
not in the sense of having lesser importance) is perhaps best spelled 
out by tracing how they combine with the “direct effects” of changes 
in national income to define two distinct, idealized models of the 
transition path from one party system to another. 

Transition via Prolonged Boom. In the first transition path, national 
income sustains a high rate of growth for a substantial period of 
time. The prolonged boom consequently exerts powerful “direct 
effects” on the party system’s primary defining axes of labor and 
trade by rapidly transforming productive techniques and the 
operation of firms. In the boom of the 1920s, for example, some 
firms and sectors experienced high rates of technical change and 
mechanization, and consequently changed their position on labor 
policy. With the major exception of the chemical industry, which still 
lagged behind the Germans, they commonly changed position on 
international economic policy as well. New leading sectors also 
appeared, of course, while some older industries slowly disappeared. 

If growth were sustained, successive scattergraphs of the party 
system would show a continuous, gradual migration of more and 
more firms or sectors from one quadrant to the other as the new bloc 
gained strength and the older one declined. Parallel to these shifts, 
political histories would probably chronicle a widening sense of 
dislocation, followed by increasingly intense polarization and, at last, 
the emergence of a distinctly new ruling bloc. But for all the conflict 
such an account might record, moments of high drama would be few 
and far between. As a whole the process would be protracted and, in 
principle, straightforward. Marked by an absence of complicating 
issues and identifiable turning points, this sort of change would by 
itself pose comparatively few puzzles for political analysis. 

Even a transition of this kind, however, would probably be 
complicated by at least two sorts of “secondary” tensions generated 
by the process of growth itself. A sustained boom, for example, is 
highly likely to bring about the rise of new firms and sectors. If older 
business elites do not succeed in entering these fast-growing sectors, 
whole new groups of entrepreneurs will emerge. While most major 
battles between what are commonly advertised as “new” and “old” 
elites turn out to involve clashes between different sectors on primary 

issues of labor and trade policy (and thus call for no special 
interpretative apparatus), the rise of new entrepreneurs can in itself 
generate a certain degree of tension. Or, as has often happened in 
American history, a major boom scrambles existing financial 
markets. As financial innovations proliferate to meet historically 
unprecedented demands for finance from whole new regions, sectors, 
and firms, competition heats up. Older market shares become 
unbalanced, and pressures build for regulatory change. While such 
“secondary” cleavages normally lack the permanence of the 
“primary” conflicts (since, after all, new elites eventually mature, and 
large-scale uncertainty resulting from long-term developmental 
pressure in the financial system typically results in “landmark” 
legislation that resolves whole ranges of issues), such conflicts 
confuse the transition to a new party system. 

Transition via Economic Depression. The most dramatic 
complications of the transition from one party system to another, 
however, arise from the simple fact that the history of the American 
political economy is far from a chronicle of continuous growth and 
progress. Along with the booms and growth spurts that help build 
and destroy political coalitions come cyclical instability and, often, 
deep and protracted depressions. These catastrophic events define the 
second transition path. 

The statistical record of depressions and party realignments 
demonstrates that even a very steep downturn will not by itself 
suffice to wreck an entrenched party system.— But if, as in 1837, 
1857, 1893-94, and the 1930s, the party system is already decaying 
because of a previous boom, then a shattering depression is likely to 
generate a variety of new pressures that will further complicate the 
transition to a new party system. 

Several distinct sorts of pressure are likely to emerge. First of all, 
the “direct effects” of deep depressions are frequently very dramatic. 
While a depression, unless it persists for many years, will not greatly 
affect the labor intensity of an economy’s production processes 
(though, of course, speedups and spreading anxieties about 
unemployment can deeply color work relations, particularly in labor- 
intensive sectors), it will certainly produce abrupt changes in different 
firms’ preferred international economic policies. When an American 
depression coincides with a world economic collapse, for example, 
many American industrialists are drastically affected by the strategies 

their foreign competitors adopt. If the volume of world trade shrinks, 
and export drives proliferate as domestic demand collapses, economic 
nationalism is certain to grow within the business community. If the 
depression persists, even many previously successful 
“internationalists” will be forced to change colors. In terms of the 
scattergraphs of the System of ’96, this implies a swift and substantial 
reshuffling of positions along the nationalist-internationalist axis—in 
a direction that in the short run dramatically reverses long-term 
trends working in favor of an open economy. 

The collapse of political blocs favoring internationalism is, 
however, only one (direct) effect of prolonged drops in the level of 
national income. Such periods also typically lead to a whole series of 
uniquely “pathological” (in the sense of non-normal and transitory) 
secondary tensions. Sustained economic decline, for example, 
normally intensifies economic rivalries, leading to waves of 
bankruptcies and defensive mergers. Appearing on the scattergraphs 
as abrupt disappearances and sudden relocations of dots, these, if 
sufficiently numerous, can redraw the shape of the whole party 
system almost overnight. Even if no general merger wave occurs, the 
positions of the largest firms in the system often change dramatically 
as the strongest surviving business groups attempt to capitalize on 
their positions and take control of other, momentarily undervalued, 

A prolonged depression is also likely to trigger two further sorts of 
“secondary” conflicts (or, perhaps more precisely, sets of secondary 
conflicts), which, when they suddenly burst forth, are likely to 
mystify observers used to thinking in terms of categories derived from 
the preceding boom. 

The first of these additional tensions can be readily identified: it is 
a dramatic rise in the importance of the money supply as a political 
issue. Whereas during most boom periods money is fairly readily 
available at a reasonable real cost—and thus as a political issue is 
unlikely for most businesses to bulk as large as labor and 
international economic policy—persisting economic declines will 
eventually generate powerful movements for lower interest rates and 
an increase in the money supply. This process, of course, takes time 
to start. In the early stages of a depression, for example, most firms 
react by cutting production, laying off workers, and, in the less 
oligopolistic parts of the economy, cutting prices. But while firms 
may briefly welcome reductions in the level of economic activity— 

because they cool off demands for wage increases and make the labor 
force more tractable—no one is likely to remain enthusiastic if the 
downturn persists and cuts deeply into profits. Nevertheless, for a 
while the bulk of the business community, or at least those in it not 
facing immediate bankruptcy, put up with the deflationary 
adjustment process, since generations of academic economists have 
persuaded most of them that deflation is the path to revitalization. 

In all modern economies, however, it has eventually become clear 
that deflation does not always restore the conditions for profitable 
accumulation at a price most of the business community can afford. 
As this lesson dawns, and losses mount even among the rich, firms 
and sectors begin to divide over measures for reflation—either an 
increase in the money supply, which, of course, carries with it the 
prospect of abandoning the gold standard or other international 
mechanisms regulating the volume of money in circulation; or higher 
government expenditures, which almost irresistibly expand the 
money supply as the government deficit is financed; or both. On one 
(deflationary) side are firms that want above all to preserve the value 
of financial assets, to retain foreign deposits (which they will lose as 
the currency devaluation consequent upon the abandonment of gold 
takes hold), and, perhaps, to protect what they believe to be the long- 
run best interests of the international financial system. Chief among 
the proponents of deflation are big international banks, insurance 
companies, and bond holders. Opposed to them is nearly everyone 
else for whom the overriding priorities increasingly become the 
maintenance of any degree of purchasing power, escape from 
increasingly heavy fixed charges, devaluation to shore up fading 
international competitiveness, or some combination thereof. This 
latter camp includes many prominent industrialists and retailers, as 
well as farmers and ordinary people. 

While many accounts of deflationary periods stress the misery they 
have brought to farmers, an industrial sector analysis of this 
transition’s pathology highlights the role of certain types of 
industries, namely those with large amounts of fixed capital. Because 
their capital is fixed, these firms take enormous losses as the 
depression persists and they have to run far below capacity for long 
periods. Many will have borrowed heavily in the preceding boom to 
finance expansion and thus feel pressure from financiers; but even 
where debt service is light, the opportunity costs of underutilized 
fixed capital still remain enormous. Firms enjoying very strong 

oligopolistic positions may be able to cope by keeping prices up; 
many others that are heavily dependent on bank financing may not 
dare to protest the deflation. These two exceptions notwithstanding, 
the logic of the demand for reflation yields an unambiguous 
prediction of which industries will lead the “emergency reflation” 
coalition “for national economic recovery”: giant, capital-intensive 
industries whose prices are breaking and that are relatively 
independent of banks (large oil companies in the Depression, for 

Once the forces of national recovery begin to march (and since by 
that moment most of them have become ardent economic nationalists 
and many are also labor-intensive, they do indeed march), a final 
kind of secondary conflict is likely to break out within the financial 

It is, of course, quite possible—and it certainly was the case in the 
1930s—that segments of the banking community may already be at 
one another’s throats for various “secondary” reasons mentioned 
earlier: because rising entrepreneurs challenge older elites who 
happen to be bankers; because of competitive pressures derived from 
secular changes in the financial structure, changes that the previous 
boom brought about; or because powerful financial groups come into 
conflict as they try to aggrandize their own relatively strong positions 
as everyone else’s asset values are collapsing. 

As economic disaster continues unabated and pressures mount for 
“national recovery,” however, fragmentation within the financial 
community is for several reasons likely to increase enormously. First, 
the spiraling collapse of the international economy increasingly calls 
into question older political alliances premised on a growing national 
income (and volume of trade). At length even some financiers will 
begin to break ranks. Obviously, defectors are most likely to come 
first and in the greatest numbers from among investment bankers 
with the smallest stakes (though their stakes may still be substantial 
by comparison with other sectors’) in the business of international 
banking and commercial bankers with the strongest ties to those 
parts of domestic industry which are up in arms over reflation—for 
example, the oil industry. Once this fragmentation gets under way it 
is likely to pick up momentum as it becomes enmeshed in debates 
over financial reform stimulated either by the previous boom or by 
the increasingly urgent monetary debates of the economic crisis.— 

Together with the direct effects of falling national income, these 

accumulating secondary tensions will immensely complicate the 
conflicts over labor and trade generated by the preceding boom. 
What during the period of prosperity (the first transition path) had 
seemed so clear—the rapid growth of a powerful bloc of 
internationally oriented, capital-intensive firms with their own 
distinct interests in more liberal trade and labor policies—now 
appears hopelessly confused. The development of the internationalist 
bloc first slows, then ceases altogether. As income continues to fall, 
history almost appears to be running backward. Economic 
nationalism spreads like wildfire. As older alliances premised on a 
growing international economy break down, “secondary” tensions 
and pathologies characteristic of depressions get full play and further 
scramble previous alignments. At length, even big banks begin openly 
to attack one another and investment banking is riven by dissent. A 
“national recovery” coalition comes to power as the internationalists 

In the short run, the strange new package of public policies that 
holds this coalition together appears only tangentially related to the 
primary tensions that had dominated the system for so many years. 
For, given a sufficiently deep contraction of the international 
economy, this transition coalition inevitably takes a strongly 
nationalist form, thus flying in the face of previously dominant trends 
that favored increasing international integration. But this impression 
is an illusion; it derives entirely from the special circumstances of the 
colossal decline in national income. As soon as recovery starts and 
other transition issues (such as monetary and banking reform) begin 
to be resolved, the old lines of cleavage over primary issues reappear. 
The national recovery coalition blows apart over labor and foreign 
economic policy, and the long-run trends evident in the preceding 
boom reassert themselves. 

In the latter part of this article I trace how a distinct multinational 
bloc first emerged in the United States after World War I. Gaining 
coherence during the boom of the 1920s, it virtually fell apart in the 
early 1930s, until national income began very slowly to rise again, 
during FDR’s “Second New Deal.” It was only then that a fresh party 
system, crowned by a new historical bloc, could emerge. 


I begin with a brief analysis of the System of ’96 as it looked in its 

pre-World War I “stable phase.”— After identifying the institutional 
basis of the period’s well-known Republican hegemony in the relative 
unity of most industry and major finance, I turn to the system’s crisis 
at the end of World War I. By tracing how the dislocated world 
economy combined with existing social tensions to divide a business 
community that until then had been solidly Republican, it becomes 
clear how the older hegemonic bloc of the System of ’96 began 
breaking into two—one part intensely nationalist, protectionist, and 
(with a few notable exceptions) generally labor-intensive; the other 
oriented to capital-intensive production processes and free trade. 

A newer multinational bloc rose to power during the New Deal. In 
accord with my earlier discussion of variations in national income 
and the two distinct paths of transitions between party systems, I 
distinguish three stages in the new bloc’s ascent. The first includes the 
period immediately following World War I and the great boom of the 
1920s. In this interval of generally rising national income (the first 
transition path), the leading firms of the emergent multinational bloc 
began to articulate their interests on labor and trade separately from 
the rest of the business community. Along with several secondary 
cleavages that the boom generated and a feature peculiar to American 
society in the 1920s (Prohibition, discussed below), the efforts this 
bloc made to alter American policy toward labor and the rest of the 
world created considerable turbulence in American politics. By the 
1928 election, the accumulating tensions had “dealigned” the 
existing structure of U.S. politics. 

The second stage of the new bloc’s rise to power occurs after the 
great crash of 1929 and major events associated with it, including the 
East Texas oil field discoveries and the British abandonment of the 
gold standard. In this interval, the political coalition that had 
dominated the United States for a generation collapsed completely, 
setting off a scramble for power. However, as I will show, the wreck 
of the System of ’96 amid frightful deflation (the second transition 
path) did not immediately bring the multinational bloc to power. 
Instead, with the collapse of the international economy, Hoover’s 
determination to remain on the gold standard at all costs sharply 
divided the business community, including the multinational bloc. 

Out of these tensions, by sequential stages, came the American 
political world we now know: first, a gradual massing of nationalist 
and inflationist business groups (and farmers); second, the rapid 
emergence of increasingly bitter divisions within the financial 

community as heretofore “secondary” disputes over the control and 
future shape of the financial system escalated, and older alliances 
based on a growing economy lost their raison d’etre ; third, the 
temporary coalescence during the First New Deal of the nationalists 
and inflationists with a famous group of financiers who sought to 
challenge the preeminence of the House of Morgan; and, finally, as 
soon as decline was arrested and the long-run logic of the first 
transition path could assert itself, a slowly improving economy that 
began spawning epic class and trade conflicts, leading to the 
triumphant reemergence of the multinational bloc during the Second 
New Deal. 

A Boom and a Bloc: The First Transition Path, 1918-1929 

At the center of the Republican Party under the System of ’96 was a 
massive bloc of major industries, including steel, textiles, coal, and, 
less monolithically, shoes, whose labor-intensive production 
processes automatically made them deadly enemies of labor and 
paladins of laissez-faire social policy.— While a few firms whose 
products dominated world markets, such as machinery firms, 
agitated for modest trade liberalization (aided occasionally by other 
industries seeking specific export advantages through trade treaties 
with particular countries), insistent pressures from foreign 
competitors led most to the ardent promotion of high tariffs.— 

Integral to this “national capitalist” bloc for most of the period 
were investment and commercial bankers. These had abandoned the 
Democrats in the 1890s when Free Silver and Populist advocates 
briefly captured the party. The financiers’ massive investments in the 
mid-1890s and after, in huge trusts that combined many smaller 
firms, gave them a large, often controlling, stake in American 
industry, brought them much closer to the industrialists (especially on 
tariffs, which Gold Democrats had abominated), and laid the 
foundation for a far more durable attachment to the GOP.— Most 
financiers also shared the industrialists’ enthusiasm for aggressive 
foreign policies directed at the other great powers, especially in Latin 
America, though they were sometimes less willing to challenge the 
British, whose capital (in many senses) remained the center of world 

World War I disrupted these cozy relations between American 
industry and finance. Overnight the United States went from a net 

debtor to a net creditor in the world economy, while the tremendous 
economic expansion induced by the war destabilized both the U.S. 
and the world economy. — Briefly advantaged by the burgeoning 
demand for labor, American workers struck in record numbers and 
for a short interval appeared likely to unionize extensively.— Not 
surprisingly, as soon as the war ended a deep crisis gripped American 
society. In the face of mounting strikes, the question of U.S. 
adherence to the League of Nations, and a wave of racial, religious, 
and ethnic conflicts, the American business community sharply 

On the central questions of labor and foreign economic policy, 
most firms in the Republican bloc were driven by the logic of the 
postwar economy to intensify their commitment to the formula of 
1896. The worldwide expansion of industrial capacity the war had 
induced left them face to face with vigorous foreign competitors. 
Consequently, they became even more ardent economic nationalists. 
Meeting British, French, and later German and other foreign 
competitors everywhere, even in the U.S. home market, they wanted 
ever higher tariffs and further indirect government assistance for their 
export drives. Their relatively labor-intensive production processes 
also required the violent suppression of the great strike wave that 
capped the boom of 1919-20 and encouraged them to press the 
“open shop” drive that left organized labor reeling for the rest of the 

However, this response was not universal in the business 
community. The new political economy of the postwar world 
pressured a relative handful of the largest and most powerful firms in 
the opposite direction. The capital-intensive firms that had grown 
disproportionately during the war were under far less pressure from 
their labor force. The biggest of them had by the end of the war also 
developed into not only American but world leaders in their product 
lines. Accordingly, while none of them were pro-union they preferred 
to conciliate rather than to repress their workforce. Those that were 
world leaders favored lower tariffs, both to stimulate world 
commerce and to open up other countries to them. They also 
supported American assistance to rebuild Europe, which for many of 
them, such as Standard Oil of New Jersey and General Electric, 
represented an important market. 

Joining these latter industrial interests were the international 
banks. Probably nothing that occurred in the United States between 

1896 and the Depression was so fundamentally destructive to the 
System of ’96 as the World War I-induced transformation of the 
United States from a net debtor to a net creditor in the world 
economy. The overhang of both public and private debts that the war 
left in its wake struck directly at the accommodation of industry and 
finance that defined the Republican Party. To revive economically 
and to pay off the debts, European countries had to run export 
surpluses. They needed to sell around the world, and they, or at least 
someone they traded with in a multilateral trading system, urgently 
needed to earn dollars by selling into the United States. Along with 
private or governmental assistance from the United States to help 
make up war losses, accordingly, the Europeans required a portal 
through the tariff walls that shielded Republican manufacturers from 
international competition. (Following the procedures described 
earlier, Figure 2.4 estimates as closely as possible the shape of both 
blocs. They are defined—somewhat arbitrarily—to include the top 
thirty firms [ranked according to assets], the big banks, and cotton 
textiles, by far the largest American industry characterized by small 

The conflict between these two groups runs through all the major 
foreign policy disputes of the 1920s: the League of Nations, the 
World Court, the great battles over tariffs, and the Dawes and Young 
plans. Initially, the older, protectionist forces won far more than they 
lost. They defeated the Leagues, kept the United States out of the 
World Court, and raised the tariff to ionospheric levels. But most 
trends in the world economy were against them. Throughout the 
1920s the ranks of the largely Eastern internationalist bloc swelled.— 

Parallel to the multinational bloc’s increasing numbers was its 
growing unity of interest. In 1922, the British opened negotiations to 
admit Standard Oil interests into Iraq. A milestone in the integration 
of the world economy, this step and related developments also 
removed a major obstacle to concrete forms of cooperation among 
the internationalists. - Indeed, it had been a split between big oil and 
big banks over the specific terms of the peace treaty that was pivotal 
in defeating the League of Nations. The original American champions 
of the League, as Massachusetts Senator Henry Cabot Lodge’s 
correspondence reveals he was vividly aware, were international 
financiers located mostly in port cities; free-trading merchants like 
Edward A. and A. Lincoln Filene; and the relative handful of 
American industrialists who favored either low tariffs (e.g., Phelps 

Dodge’s Cleveland Dodge, a major supporter and close friend of 
Woodrow Wilson) or direct foreign investment. By contrast, the 
League terrified most American manufacturers who feared, as the 
American Tariff League expressed it, that “the League of Nations is 
simply a rally ground for free traders and all who are opposed to the 
doctrine of ‘adequate protection’ for the industries and labor of the 
United States.”— 










INT'L / 










2 / 

cc / 

g / 










/ 5 















FIGURE 2.4. The New Deal Coalition, ca. 1929 and 1935 

Notes: Vertical axis is ordinal, as in fig. 2.2 . Companies and industries located left and 
above the dashed line were far more likely to favor the New Deal; the line thus encloses the 
leaders of the capital-intensive free trade bloc in the 1920s and 1930s. Between the late 
1920s and the mid-1930s the copper industry changed position. In the 1920s it belongs near 
“other auto companies”; in the 1930s, near “steel.” See note 27. 

Led by groups like the American Tariff League, the Boston Home 
Market Club (a long-time political base of Lodge’s, “the Senator 
from Textiles”), and the League for the Preservation of American 

Independence—dominated by upstate New York industrialist 
Stuyvesant Fish and Louis A. Coolidge, a close friend of Lodge’s and 
treasurer of the giant Boston-based United Shoe Machinery (which 
was probably seeking to protect its clientele among U.S. shoe 
producers)—these “Irreconcilables” launched a powerful 
counterattack.— Their success came only because of a fatal split 
among the internationalists. At the climax of the struggle over the 
League of Nations, the Standard Oil companies, which had already 
come out for tariff reform, were locked in a bitter struggle with the 
British over control of Middle Eastern and Latin American oil 
reserves. Because of the advantages the League was thought to afford 
British interests, Rockefeller, Standard Oil policy adviser and 
Rockefeller family associate Charles Evans Hughes, and other 
dedicated internationalists allied with petroleum producers were able 
to endorse the League only “with reservations.”— Their opposition, 
added to that of Lodge’s “Irreconcilables” and many other 
protectionist spokesmen, helped doom Wilson’s original plan. 
Warren Harding’s subsequent plan to resubmit a compromise 
measure, endorsed in principle by all the internationalists, was 
shelved after it was bitterly attacked by the nationalists; and after the 
multinational bloc discovered it could achieve its immediate foreign- 
policy objectives by working unofficially around Congress with key 
executive-branch functionaries and New York Federal Reserve Bank 
officials. — 

Along with its increasing internal homogeneity, the multinational 
bloc enjoyed several other long-run advantages, which helped 
enormously in overcoming the new bloc’s relative numerical 
insignificance vis-a-vis its older rival. The multinational bloc included 
many of the largest, most rapidly growing corporations in the 
economy. Recognized industry leaders with the most sophisticated 
managements, they embodied the norms of professionalism and 
scientific advance that in this period fired the imagination of large 
parts of American society.— The largest of them also dominated 
major American foundations, which were coming to exercise major 
influence not only on the climate of opinion but on the specific 
content of American public policy.— And, while I cannot pause to 
justify the claims in this article, what might be termed the 
“multinational liberalism” of the internationalists was also aided 
significantly by the spread of liberal Protestantism; by a newspaper 

stratification that brought the free-trade organ of international 
finance, the New York Times, to the top; by the growth of capital- 
intensive network radio in the dominant Eastern, internationally 
oriented environment; and by the rise of major news magazines. 
These last promised, as Raymond Moley himself intoned while taking 
over what became Newsweek, to provide “Averell [Harriman] and 
Vincent [Astor] . . . with a means for influencing public opinion 
generally outside of both parties.”— 

Closely paralleling the business community’s differences over 
foreign policy was its split over labor policy. Analysts have correctly 
stressed that the 1920s were a period of violent hostility toward labor 
unions. But they have largely failed to notice the significant, 
sectorally specific modulation in the tactics and strategy employed by 
American business to deal with the labor movement. 

The war-induced boom of 1918-19 cleared labor markets and led 
to a brief but sharp rise in strikes and the power of labor. A White 
House conference called by Wilson to discuss the situation ended in 
stalemate. John D. Rockefeller Jr. and representatives of General 
Electric urged conciliatory programs of “employee representation” 
(company-dominated, plant-specific works councils). Steel and other 
relatively labor-intensive industries, however, rejected the approach. 
Led by Elbert Gary, head of U.S. Steel, they joined forces, crushed the 
great steel strike of 1919, and organized the American-plan drives of 
the 1920s.— 

Rockefeller and Gary broke personal relations. Rockefeller 
supported an attack on the steel companies by the Inter-Church 
World Movement, an organization of liberal Protestants for which he 
raised funds and served as a director. Later he organized a consulting 
firm, Industrial Relations Counsellors, to promote 
nonconfrontational “scientific” approaches to labor conflict. For a 
while the firm operated out of his attorney’s office, but eventually it 
acquired space of its own. It continued to receive grants from the 
Rockefeller Foundation and to involve Rockefeller personally. - 

Industrial Relations Counsellors assisted an unheralded group of 
capital-intensive firms and banks throughout the 1920s—a group 
whose key members included top management figures of General 
Electric, Standard Oil of New Jersey, and partners of the House of 
Morgan. Calling themselves the “Special Conference Committee,” 
this group promoted various programs of advanced industrial 


Industrial Relations Counsellors worked with the leading figures of 
at least one group of medium-sized firms. Perhaps ironically, they 
were organized in the Taylor Society, once the home of Frederick 
Taylor’s well-known project for reorganizing the labor process. Two 
types of firms comprised this group: technically advanced enterprises 
in highly cyclical (hence, in the 1930s, highly depressed) industries 
like machine tools, and medium-sized “best practice” firms in 
declining sectors. Mostly located in the Northeast, these latter firms 
hoped that the introduction of the latest management and labor 
relations techniques would afford them cost advantages over 
burgeoning low-wage competitors in the South. A sort of flying 
buttress to the core of the multinational bloc, most of these firms 
strongly favored freer trade, while several future New Dealers, 
including Rexford Tugwell and Felix Frankfurter, worked with 

The leading figures in Industrial Relations Counsellors and their 
associates (who included, notably, Beardsley Ruml, head of the 
Spelman Fund, a part of the Rockefeller complex that began funding 
the first university-based industrial relations research centers) played 
important roles in virtually all major developments in labor policy 
across the 1920s. These included the campaign that forced the steel 
industry to accept the eight-hour day (which Herbert Hoover led in 
public); the milestone Railway Labor Act; and the increasing criticism 
of the use of injunctions in labor disputes (a legal weapon that was 
an essential element of the System of ’96’s labor policy) that 
eventually led to the Norris-La Guardia Act.— 

Under all these accumulating tensions the elite core of the 
Republican Party began to disintegrate. The great boom of the 1920s 
exacerbated all the primary tensions over labor and international 
relations just described, while it greatly enhanced the position of the 
major oil companies and other capital-intensive firms in the economy 
as a whole (see table 2.1 ). Though their greatest effects came after the 
downturn in 1929, secondary tensions also multiplied during the 
boom. One, which affected partisan competition even in the 1920s, 
concerned investment banking. A flock of new (or suddenly growing) 
houses sprang up and began to compete for dominance with the 
established leaders: the House of Morgan and Kuhn, Loeb. In time 
these firms would produce a generation of famous Democrats: James 
Forrestal of Dillon, Read; Averell Harriman of Brown Brothers 

Harriman; Sidney Weinberg of Goldman, Sachs; John Milton 
Hancock and Herbert Lehman of Lehman Brothers. Because many 
(though not all) of these bankers were Jewish, the competition with 
Morgan almost immediately assumed an ugly tone. J. P. Morgan Jr. 
quietly encouraged Henry Ford’s circulation of the notorious 
Protocols of the Elders of Zion in the early 1920s, and later his bank 
forbade Morgan-Harjes, the firm’s Paris partner, to honor letters of 
credit from Manufacturers Trust, a commercial bank with strong ties 
to Goldman, Sachs, and Lehman Brothers.— 

In commercial banking, rivals also began to contest Morgan’s 
position. The Bank of America rose rapidly to become one of the 
largest commercial banks in the world. Though the competition did 
not yet take partisan form, the bank bitterly opposed Morgan 
interests, which attempted to use the New York Federal Reserve 
Bank against it. Morgan also was hostile to Joseph Kennedy and 
other rising financial powers.— 

TABLE 2.1 Largest American Industrials, 1909-1948 (Ranked by Assets) 







U.S. Steel 






Standard Oil of New Jersey 






American Tobacco 




International Mercantile Marine 









International Harvester 






Central Leather 









American Sugar 


U.S. Rubber 



American Smelting & Refining 










Consolidation Coal 


General Electric 






ACF Industries 


Colorado Fuel & Iron 


Com Products Refining 


New England Navigation 


General Motors 





Bethlehem Steel 










Socony Mobil 





Midvale Steel 


Sinclair Oil 















Union Carbide 



Standard Oil of Indiana 




Standard Oil of California 











General Theater Equipment 


Kennecott Copper 





Sears Roebuck 




Western Electric 


Source: A.D.H. Kaplan, Big Enterprise in a Competitive Setting (Washington, D.C.: 
Brookings, 1962), pp. 140 ff. 

The cumulative impact of all these pressures became evident in the 
election of 1928. Some of the investment bankers, notably Harriman, 
turned to the Democrats. Enraged by the House of Morgan’s use of 
the New York Fed to control American interest rates for the sake of 
its international objectives, Chicago bankers, led by First National’s 
Melvin Traylor, organized and went to the Democratic convention as 
a massed body.— 

Most sensationally of all, elements of the arch-nationalist, 
previously rockribbed Republican chemical industry went over to the 
Democrats. A more vivid illustration of how primary and secondary 

tensions generated by the boom were dealigning traditional elite 
alliances could scarcely be found. For more than a generation, the 
chemical industry had been solidly Republican. Industry spokesmen 
and publications never ceased observing that only the GOP tariff 
walls stood between them and ruin at the hands of foreign, especially 
German, competitors.— Before 1928 it would have been unthinkable 
for DuPont or some Union Carbide executives openly to support a 
national Democrat. 

Behind this dramatic reversal is a political evolution that has three 
main parts. The special situation of the DuPont family in relation to 
other great fortunes in American society of that period constitutes the 
point of departure. Such statistics as are available indicate that the 
bulk of the truly colossal fortunes in America were made prior to 
World War I. (Not that a great amount of money has not been made 
since, but few newer fortunes have been generated to match those of 
Rockefeller, Morgan, or Henry Ford.)— The rise of the DuPonts, 
however, began with their profits from World War I explosives sales 
and continued with their investment in General Motors.— By 
comparison with most of the American superrich in the 1920s, the 
DuPonts’ ratio of wealth to income was considerably below average. 
Consequently, while all the rich were strongly in favor of reduced 
taxes, which had risen as a consequence of the war, the DuPonts had 
a bigger incentive than most.— 

Their spectacular success in the 1920s rendered the situation even 
more urgent. Not only did their General Motors investments and the 
DuPont corporation grow, but so did their position in United States 
Rubber and other large companies. By about 1925 Pierre DuPont had 
decided that reduced income taxes would require finding another 
source of revenue for the government. Consequently he, his brothers 
Irenee and Lammot, and several close associates, including John J. 
Raskob, took over the Association Against the Prohibition 
Amendment (AAPA). They campaigned throughout the country, 
opening contacts with hundreds of newspapers, aiming to encourage 
a repeal of national Prohibition and then to levy taxes on liquor. At 
the start, the campaign was bipartisan: “As our average tax 
collections for the years 1923-26 from individuals and corporations 
were $1,817,000,000 resulting in a considerable surplus, it is fair to 
say that the British liquor policy applied in the United States [i.e. the 
legalization of liquor] would permit the total abolition of the Income 

Tax both personal and corporate. Or this liquor tax would be 
sufficient to pay off the entire debt of the United States, interest and 
principal, in a little less than fifteen years.”— 

The enormous departure this program represented from previous 
norms of the American upper class merits some attention. For over a 
century prohibition had been a cause not only of rural drys but, more 
importantly, of major manufacturers.— Large fortunes like the 
Rockefellers’, together with some big retailers like J. C. Penney, had 
been lavish contributors to the Anti-Saloon League and other 
proponents of liquor restrictions.— Their opposition to liquor was 
rationalized on religious grounds, although it was certainly also 
rooted in their desire to control unruly lower-class behavior.^ 4 
DuPont, however, represented the cutting edge of science-based 
industry, the most powerful secularizing force in history. 

But the DuPont interests had more concrete objectives than 
witnessing the cultural transformation of modern capitalism. Friction 
was increasing between this newly ascendent group and other large 
American fortunes—in particular with the House of Morgan, which 
had a strong, though minority, position in General Motors. After 
several unpleasant encounters, including a dispute over how much 
DuPont enterprises should pay for Morgan financing, the DuPonts 
made a bid for a share of Morgan’s own U.S. Steel. After DuPont 
began a massive purchase of U.S. Steel stock, the Federal Trade 
Commission began an investigation (on a few hours’ notice), forcing 
DuPont to back off.— 

Meriting separate mention as a cause of the “dealignment” of the 
party structure was an aspect of the rivalry with Morgan that related 
directly to the great foreign economic policy dispute that marked the 
1920s but has so far been virtually unappreciated: American attempts 
to aid the reconstruction of Germany. American officials had seized 
German patents in the chemical and other industries during the war. 
Though the peace agreement (the United States, of course, did not 
ratify the Versailles Treaty) with Germany acknowledged the U.S. 
right to the patents, a Homeric struggle quickly broke out over what 
was to be done with them. Internationalists wanted to return at least 
some of them so that the Germans could build up an export capacity 
and pay off war debts. The chemical industry wanted to keep them.— 

At first, the chemical industry prevailed. The Chemical Foundation 
was established to hold and license the patents. DuPont held about 

one-third of the stock, and the rest was held by other concerns. The 
foundation became the battleground for internationalist and 
protectionist forces. German chemical company agents worked with 
American bankers and government officials, including senators and 
President Harding himself, to get the patents back. To keep track of 
these efforts, the Chemical Foundation’s able head, Francis P. 
Garvan, engaged private detectives. The surviving reports from these 
men, who were probably former Federal Bureau of Investigation 
(FBI) agents, can be partially verified from other sources and vividly 
testify to the tensions that quickly developed.— 

The banks and their allies could not overcome protectionist 
opposition. Former Attorney General Harry Daugherty was indicted 
for taking a bribe to help return German assets.— J. Edgar Hoover, a 
close political ally of Chemical Foundation attorney A. Mitchell 
Palmer and Garvan, was appointed, and removed suspected German 
agents from the FBI. And the government lost the suit it brought to 
force the Chemical Foundation to return the patents—in Wilmington, 

Continuing strains on the world economy intensified the pressure 
to aid Germany and heightened the antagonism between DuPont and 
the multinationals. Allen Dulles and other high officials in the U.S. 
Department of State attempted to stop American munitions exports 
that competed with the Germans; meanwhile, the Chemical 
Foundation was actively encouraging French resistance to Allied 
plans to put Germany back on its feet.— As American bankers helped 
organize huge loans to the Germans and looked on while most of the 
German chemical industry consolidated into one gigantic combine— 
I. G. Farben—tensions mounted.— 

Although the DuPont Co. had repeatedly explored (and would 
continue to explore, without much success) possibilities for coming 
separately to terms with the Germans, Pierre’s brother Irenee, the 
president of the company, hand-delivered a stiff note protesting 
American loans for potential German competitors to Secretary of 
Commerce Herbert Hoover.— The Chemical Foundation and other 
industry leaders joined in the campaign, but their efforts drew strong 
opposition. When the newly established Institute of Economics in 
Washington, D. C., prepared a skeptical report about foreign loans, 
the banks intervened and threatened its grants. Shortly thereafter the 
institute merged with another organization (creating the modern 

Brookings Institution). 

I learned yesterday, confidentially but reliably that the continued existence of the 
Institute of Economics in Washington ... is threatened. The Institute lives off a yearly 
grant of $150,000.00 which the Carnegie Corporation of New York awarded for ten 
years. In the next few days the Carnegie Corporation will decide whether this grant 
will be paid beyond 1932. In the heart of the Corporation strong opposition has risen. 
The leader of the opposition is [Russell] Leffingwell, a member of the Morgan firm, 
who has for a long time been angry at the publications of the Institute, especially the 
books over Germany and France, because they depict the economic situation of these 
lands skeptically, and therefore influence the prospects for the bringing of the loans to 
these lands on the American market. It is clear that Leffingwell as a banker doesn’t 
like such books. Also, [Garrard] Winston from the Treasury Department who in 
previous years had been friendly to the Institute is said in the most recent days to have 
turned and labeled the publications of the Institute “simple propaganda.” 

Whether under these circumstances the plan of the Institute to write a new book on 
Germany and [the] Dawes plan can be carried out, or whether [Harold] Moulton [the 
Institute’s head], who now fears the anger of the bankers, can find the courage to 

publish such a book is questionable.— 

As the presidential election of 1928 loomed, all sides organized. 
The DuPont Co., for example, bought more than two dozen 
memberships for its top officials in the American Protective Tariff 
League, which had until then been declining.— The Chemical 
Foundation repeatedly sought to dissuade financiers from making 
additional foreign loans. 

In early 1928 these conflicts came to a head. Anxious to secure 
support from leaders of the internationalist bloc, Secretary of 
Commerce Hoover sent emissaries to Thomas Lamont at the House 
of Morgan. While not as rousing as it might have been, Lamont’s 
response suggested that he and other internationalists might be open 
to persuasion: 

The ground swell for Hoover seems to be rolling up. Within the last two weeks, 
Hoover sent first Norman Davis [a close associate of Lamont’s and formerly 
Woodrow Wilson’s undersecretary of state], then Julius Barnes to me, complaining 
that our partners—he mentioned you as a former one, and Tom Cochran—had been 
working against him and for Dawes [who later dropped out]. Barnes wanted to know 
what our real attitude was. I told him that there was no attitude as attaching to the 
firm in the whole matter. Each member of the firm, Republican or Democrat, as the 
case might be, had his own particular preferences. I said that we had always felt very 
friendly here toward Hoover. ... I said that if Hoover were the nominee of the 
Republican Party we should all expect to support him loyally. With this Barnes 
expressed himself as very well satisfied and said that what he feared was that even if 
Hoover were the nominee the prejudice of some members here against him was so 

great as to lead them to work against him. I reassured him on that point.— 

A tense and complex process of accommodation now began 
between Hoover and most of the multinational bloc. First, Wall 
Street lawyer John Foster Dulles, Lamont’s old associate at the 
Versailles Conference and (because he was widely recognized as the 
leading American expert on Germany) already deeply involved in the 
advance planning for what eventually became the “Young Plan” 
revision of the older Dawes Agreement, crossed party lines—Dulles 
had backed Democratic candidate John W. Davis in 1924—and 
jumped aboard Hoover’s bandwagon. — Warning German newspaper 
correspondents about the sensitivity of German reconstruction 
questions, Dulles quickly emerged as an important Hoover adviser. 
As Dulles joined his campaign, Hoover called a conference attended 
by representatives of most of the major American chemical 
companies, in part to discuss American policy toward I. G. Farben. 
Then he left town while a top operative in his preconvention 
campaign, Assistant Attorney General William (“Wild Bill”) 
Donovan, addressed the group. Basing his decision in part on 
material supplied by I. G. Farben (through the German embassy), 
Donovan announced that the I. G.’s practices did not violate 
American antitrust laws.— 

Almost simultaneously, long-running negotiations to divide parts 
of the world market for various products between DuPont, I G. 
Farben, Britain’s ICI, Allied, and other big chemical companies 
stalled. So did other talks aimed at wider agreements between 
DuPont, I. G. Farben, and ICI. Standard Oil of New Jersey formed its 
notorious “cartel” with I. G. and, together with the National City 
Bank and others, began preparing to establish American-I. G. 

As secretary of commerce, Hoover had acquired an immense 
reputation as the champion of American domestic industry. Right up 
to convention time, accordingly, important internationalists persisted 
in discreet attempts to renominate Coolidge. But as it became clear 
that the president could not be persuaded to run for what was 
generally reckoned to be a third term, more and more of them moved 
toward Hoover. After Democratic candidate A1 Smith rejected an 
internationalist foreign-policy plank drawn up by an attorney for J. 
D. Rockefeller Jr. and Hoover declined to accept a platform plank, 
proposed by top executives of many chemical concerns and the 
Chemical Foundation, that condemned American capital exports to 
foreign competitors, the trend in favor of Hoover sharply accelerated. 

With Hoover taking the side of the internationalists and receiving 
support from almost all the major figures of multinational liberalism, 
DuPont bolted. After a row on the General Motors board (where the 
House of Morgan, the Fishers, and other interests were aghast) John 
J. Raskob, an official of both General Motors and DuPont and a 
longtime associate of Pierre DuPont, assumed leadership of A1 
Smith’s campaign. This created a sensation. But with Smith running 
for president against Prohibition on the only high-tariff platform in 
the history of the Democratic Party, the Democrats divided. Some 
Southerners deserted the party. Meanwhile, in New York, Franklin 
D. Roosevelt ran a gubernatorial campaign that clearly established 
distance between himself and Smith. 

Though Smith’s loss left a vacuum inside the Democratic Party, the 
strength of his urban support suggested that the next nomination 
could be worth a great deal. Raskob and DuPont moved to secure 
their control by establishing the modern form of the Democratic 
National Committee.— They pumped thousands of dollars into the 
party, for the first time giving it the means to hire permanent staff 
between campaigns. They also waged a vigorous propaganda war 
against Hoover. 

The Path to Catastrophe: Falling Income and “National Recovery " 

The onset of the Great Depression opened a new phase in the decay 
of the now creaking System of ’96. As the Depression grew worse, 
demands for government action proliferated. But Hoover, who 
gradually became so in thrall to the big banks that he concealed 
Morgan’s crucial role in initiating his famous European debt 
moratorium of June 1931 by deliberately faking entries in a “diary” 
that he left historians (one of whom years later cited it as evidence for 
the independence of Hoover, and the American state from the 
bankers), opposed deficit-financed expenditures and easy monetary 
policies.— After the British abandoned the gold standard in 
September 1931 and moved to establish a preferential trading bloc, 
the intransigence of Hoover and the financiers put the international 
economy onto a collision course with American domestic politics. 
Increasingly squeezed industrialists and farmers began clamoring for 
government help in the form of tariffs even higher than those in the 
recently passed Smoot-Hawley bill; they also called for legalized 
cartels and, ever more loudly, a devaluation of the dollar through a 

large increase in the money supply. 

Concerned, as Federal Reserve minutes show, at the prospect that 
the business groups and farmers might coalesce with angry, bonus¬ 
marching veterans, and worried by French gold withdrawals and 
fears that not only farmers and workers, but leading bankers, might 
go bankrupt, the Fed briefly attempted to relieve the pressure by 
expansionary open-market operations. But after a few months, the 
policy was abandoned as foreigners withdrew more gold and bankers 
in Chicago and elsewhere complained that the drop in short-term 
interest rates was driving down interest rates on short-term 
government debt (and thus bank profits, which, given the scarcity of 
long-term debt and the disappearance of industrial loans in Federal 
Reserve districts outside of New York, now depended directly on 
these rates).— 

Exactly as the earlier discussion of the effects of deflation on 
political coalitions suggested, Hoover’s commitment to gold began 
driving inflationist, usually protectionist businessmen out of the GOP 
to the Democrats. Their swarming ranks (which, as will become 
evident below, came to include several major oil companies) triggered 
a virtual identity crisis among party regulars. As familiar rules of 
thumb about the growth of the world economy grew increasingly 
anachronistic, the mushrooming sentiment for monetary expansion 
and economic nationalism scrambled the calculations of the 
contenders for the Democratic nomination. 

The developing situation called for the highest kind of political 
judgment from aspiring presidential candidates. At this point a 
legendary political operative came out of retirement to advise 
Franklin D. Roosevelt. Colonel Edward House had been a longtime 
adviser to Woodrow Wilson, normally an ardent champion of low 
tariffs and the League of Nations; but, perhaps most important for 
the First New Deal, he was now closely associated with Rockefeller 
interests.— Along with the more famous Brain Trust, which 
functioned largely as a transmission belt for the ideas of others, 
including, notably, investment bankers from Lehman Brothers, 
House helped chart Roosevelt’s early path.— It was calculated to blur 
his image and make him acceptable to all factions of the party. 
Making overtures to William Randolph Hearst and other like-minded 
businessmen, Roosevelt repudiated his earlier strong support for the 
League of Nations, talked rather vaguely of raising tariffs, and began 

showing an interest in major revision of the antitrust laws.— 

The tactics were successful. Roosevelt’s supporters were able to 
defeat Smith and turn back an eleventh-hour effort led by Morgan, 
the National City Bank (which feared Roosevelt might abandon 
gold), and many public utilities (whose leader, Wendell Wilkie, 
helped organize a telegram blitz of the convention) to nominate 
Cleveland bank attorney Newton D. Baker. 

Coming into office at the very darkest moment of the Depression, 
with all the banks closed, Roosevelt moved immediately to restore 
business confidence and reform the wrecked banking structure. The 
real significance of this bank reform has been misperceived. With the 
world economy reeling, the shared interest in a liberal world 
economy that normally (i.e., when the economy was growing) bound 
powerful rivals together in one political coalition was disappearing. 
In this once-in-a-lifetime context, what had previously been 
secondary tensions between rival financial groups now suddenly 
came briefly, but centrally, to define the national political agenda. 
With workers, farmers, and many industrialists up in arms against 
finance in general and its most famous symbol, the House of 
Morgan, in particular, virtually all the major non-Morgan investment 
banks in America lined up behind Roosevelt. And, in perhaps the 
least appreciated aspect of the New Deal, so did the now Rockefeller- 
controlled Chase National Bank. 

In the eighteen months previous to the election, relations between 
Rockefeller and Morgan interests had deteriorated drastically. After 
the crash of 1929, Equitable Trust, which Rockefeller had purchased 
and in the late 1920s sought to build up, had been forced to merge 
with the Morgan-oriented Chase National Bank. The merger caused 
trouble virtually from the beginning. Lamont and several other 
banking executives allied with Morgan attempted to block the ascent 
of Winthrop Aldrich, the brother-in-law of John D. Rockefeller Jr., to 
the presidency of the Chase. Their efforts, however, proved 
unsuccessful, and Aldrich quickly, if apparently rather tensely, 
assumed an important role in Chase’s management. But when 
Rockefeller attempted to secure a loan for the construction of 
Rockefeller Center (which threatened [Pierre] DuPont and Raskob’s 
Empire State Building, already under construction and unable to rent 
all its space with the collapse of real-estate values), the bank seems 
not to have gone along. The chief financing had to come instead from 
Metropolitan Life. An old dispute between two transit companies, 

one controlled by the Morgans and the other perhaps by the 
Rockefellers, also created problems. - 

Though sniping from holdover employees continued for several 
years, operating control of Chase passed definitively out of Morgan 
hands in late 1932. With longtime Chase head Albert Wiggin retiring, 
Aldrich was announced as the next chairman of the bank’s governing 
board, and plans were made to reorganize the board of directors. 

In the meantime, East Texas oil discoveries dropped the price of oil 
to ten cents a barrel. It was a development that, among other things, 
ruined the cost calculations underlying the Standard-I. G. Farben 
schemes for massive synthetic oil production and removed that issue 
from the political agenda. But it also brought the entire oil industry 
to the brink of disaster. Becoming more interested in oil and domestic 
recovery, and less in banking, Rockefeller interests urged a 
substantial relief program on Hoover, who brusquely rejected it. 
Almost simultaneously top Rockefeller advisor Beardsley Ruml, then 
still at the helm of the Spelman Fund and a prominent Democrat, 
began promoting a complicated plan for agricultural adjustment. At 
Chicago the Roosevelt forces accepted some of its basic concepts, just 
ahead of the convention. 

Only a few days before the 1932 presidential election, Morgan 
discovered that high Chase officials were supporting Roosevelt.— 
House’s daughter was married to Gordon Auchincloss, Aldrich’s best 
friend and himself a member of the Chase board. During the 
campaign and transition period, House and Vincent Astor, 
Roosevelt’s cousin and also a member of the reorganized Chase 
board, passed messages between Roosevelt and Chase.— 

A few days after Roosevelt was inaugurated, Chase and the 
investment bankers started their campaign, both in public and in 
private, for a new banking law. Aldrich made a dramatic public plea 
for the complete separation of investment and commercial banking. 
Then he began personally to lobby Roosevelt and high administration 
officials: “I have had a very interesting and refreshing conversation 
with Mr. W. W. Aldrich. ... I also suggest that you consider calling 
in, when convenient to you, Senators Glass and Bulkley and Mr. 
Aldrich to discuss the advisability and necessity for dealing not only 
with the divorcement of affiliates from commercial banks but the 
complete divorcement of functions between the issuance of securities 
by private banks over whom there is no supervision and the business 

of commercial banks. We feel that this suggestion should be 
incorporated in the Glass Banking Bill.”— 

Aldrich also joined the ancestral enemies of the banks—William 
Randolph Hearst, Samuel Untermeyer, South Dakota Senator Peter 
Norbeck, and others promoting Ferdinand Pecora’s investigation of J. 
P. Morgan & Co. He cooperated fully with the investigation, 
promoted “reforms,” and aided investigators examining the Wiggin 
era at Chase. 

Winthrop Aldrich, President of the Chase National Bank, got in touch with me 
yesterday through Gordon Auchincloss. I found Aldrich sympathetic to the last degree 
of what the President is trying to do, and I advised him to tell the Banking Committee 
the whole story. He is prepared to do this, and has gone to the country today to write 
his proposed testimony in the form of a memorandum, a copy of which he is to send 
me tomorrow morning. He intimated that if there was any part of it that I thought 
should be changed he would consider doing so. . . . He tells me that his Board is back 
of him and some few of the leading bankers. However, most of them are critical and 

many are bitter because of what they term his not standing with his colleagues.— 

These efforts came to fruition in the Glass-Steagall Act. By 
separating investment from commercial banking, this measure 
destroyed the unity of the two functions whose combination had 
been the basis of Morgan hegemony in American finance. It also 
opened the way to a financial structure crowned by a giant bank with 
special ties to a capital-intensive industry—oil. 

With most of the (Morgan-dominated) banking community 
opposed to him, Roosevelt looked toward industry for allies. By now 
an uncountably large number of firms, for reasons discussed earlier, 
were actively seeking inflation and, usually, an abandonment of the 
gold standard. For more than a year, for example, Royal Dutch Shell, 
led by Sir Henri Deterding, had been campaigning to get Britain, the 
United States, and other major countries to remonetize silver. At 
some point—it is impossible to say exactly when—Deterding and his 
American financial advisor Rene Leon began coordinating efforts to 
secure some kind of reflation with James A. Moffett, a longtime 
director and high official of Standard Oil Co. of New Jersey and a 
friend and early supporter of Roosevelt.— 

While they campaigned to expand the money supply, a powerful 
group of industrialists, large farm organizations, and retailers 
organized separately for the same general end. Led by Bendix, 
Remington Rand, and Sears Roebuck, they called themselves “The 
Committee for the Nation.” As Roosevelt took over in the spring of 

1933, contributions from Standard Oil of New Jersey and many 
other industrial firms were swelling this committee’s warchest.— The 
committee was vigorously pushing the president to go off the gold 

Working closely with sympathizers in the Treasury Department, 
the banks fought back. Federal Reserve Bank minutes show the 
Executive Committee of the System Open Market Committee 
distinguishing between “technical” and “political” adjustments of the 
money supply, with the political adjustments designed to head off 
demands for reflation.— But the industrialists could not be denied. 
Moffett and Leon found legal authority for Roosevelt to go off gold 
during the banking crisis, when even the banks conceded the step to 
be briefly necessary. Later the same pair teamed up to reach 
Roosevelt at the crucial moment of the London Economic Conference 
and persuaded him to send the famous telegram destroying the hopes 
for informal agreements on currency stabilization devoutly wished 
for and almost achieved by James P. Warburg and other international 
financiers.— Still pressured by the Committee for the Nation and the 
oil companies, Roosevelt embarked on his famous gold-buying 
experiments in the autumn, driving most of the banks to distraction. 
Roosevelt also continued with the National Recovery Administration, 
whose name wonderfully symbolized the logic of a political coalition 
built around protectionist industrialists (whose ranks had been 
swelled by the collapse of world trade, and with whom even major 
oil companies desperate for price controls could at least cooperate), 
farmers, and the handful of major bankers whose distinctive trait was 
an absence of ties to Morgan and, in the most important case, a 
special relationship with the oil industry. 

When the first treasury secretary, William Woodin, had to resign 
because of ill health, Henry Morgenthau Jr., the Committee for the 
Nation’s candidate to replace him, received the job. 

I noted with a great deal of pleasure the appointment of Mr. Morgenthau as Assistant 
Secretary of the Treasury, which I assume put him in charge of the Treasury 
Department during Mr. Woodin’s illness. If that illness continues, I trust that Mr. 
Morgenthau will become his successor. There is a certain group of men in this 
country, who opposed your nomination and your election, and who have opposed the 
great majority of the policies you have put into effect and who are preparing for the 
final fight against your monetary policy. In every possible way they are putting out a 
barrage to interfere with the fulfillment of that policy. You are fortunate in having a 
man like Mr. Morgenthau who will have the strength and courage to carry out that 

monetary policy.— 

The Phoenix Rises: Economic Upturn and the Return of the 
Multinational Bloc 

But as part l’s analysis suggested as to how recovery threatens 
political coalitions built around the relief of monetary emergencies, 
this first New Deal was desperately unstable. Once the worst phase 
of deflation ended and the economy began slowly to revive ( table 
2.2 ), industries with good long-term prospects in the world economy 
would start exploring ways to resume profitable overseas business. In 
time, this search would necessarily bring them back in the direction 
of the international banks, which (with the obvious exceptions noted 
above) generally opposed the NRA, and away from the economic 
nationalists for most of whom the NRA initially represented the 
promised land. In addition, the NRA’s half-hearted and incoherently 
designed attempt to supplement price mechanisms with 
administrative processes for the allocation of resources bitterly 
divided its natural constituency of protectionist businessmen. 

TABLE 2.2 National Income by Quarters, 1929-1936 (in 1972 Sbillions) 

































































Source: Figures for “actual real GNP” from Robert J. Gordon, unpublished data appendix to 
“Price Inertia and Policy Ineffectiveness in the United States, 1890-1980,” Journal of 
Political Economy 90, 6 (1982), pp. 1087-1116. Numbers rounded. 

Not surprisingly, therefore, the NRA began to self-destruct almost 
from the moment it began operations. Freer traders fought with 
protectionists; big firms battled with smaller competitors; buyers 
collided with suppliers. The result was chaos. The situation was 
especially grave in the biggest industry of all, the oil industry. There 
the majors and the smaller independent oil companies stalemated in 

the face of massive overproduction from the new East Texas fields.— 

As the industries fought, labor stirred. A bitter series of strikes 
erupted as the ambiguous wording of the National Recovery Act’s 7 
A clause, guaranteeing employee representation, came to be 
interpreted as securing “company” rather than independent trade 


With the pressure beginning to tell on Roosevelt, he looked around 
for new allies. He sponsored an inquiry into foreign economic policy 
conducted by Ruml, which recommended freer trade. Simultaneously 
he allowed Secretary of State Hull to promote reciprocal trade 
treaties in a series of speeches. The prospect of a change in U.S. tariff 
policy drew applause from segments of the business community that 
had mostly been hostile to Roosevelt. The Council on Foreign 
Relations sponsored a symposium in which journalist Walter 
Lippmann declared that freedom itself could probably not be 
maintained without free trade.— 

As the first New Deal coalition disintegrated under the impact of 
inter-industrial and class conflicts, Roosevelt turned more definitely 
toward free trade. He pushed through Congress a new bill (bitterly 
opposed by steel, chemicals, and other industries) giving Hull the 
authority to negotiate lower tariffs and then let him build support for 
the trade treaties. 

The rest of the New Deal’s program stalled. With their public 
support already eroded, the NRA and other measures were declared 
unconstitutional by the Supreme Court. Largely out of ideas, Adolph 
A. Berle and other administrators anxiously eyed the activity of the 
Left; the prospect of strikes, especially in the steel industry; and 
sporadic urban disorders. 

Mr. Berle stressed the need for prompt action in any program of economic security. 
He dreads the coming winter. While the City of New York has gotten along better in 
the past months than was to be expected, the City’s finances are near the exhaustion 
point. Mr. Berle also stated that the ‘market’ was ‘jittery’ about the credit of the 
federal government. Another complete financial collapse is distinctly possible if ‘Wall 
Street’ should decide to ‘dump’ U.S. bonds, which Mr. Berle thinks it might be foolish 
enough to do. The Communists are making rapid gains in New York City and the one 
thing that can save the city is very prompt action which will give the people out of 
work something better than they now have. The fiscal situation is such that the total 
costs of taking care of these people cannot be increased. The prompt enactment of an 
unemployment insurance bill and, if possible, old age pension legislation would have a 
very wholesome effect. Mr. Berle believes that the unemployment insurance system 
should be a national one, but with regional differentials, but he thinks that something 
like the regional organization in the Federal Reserve Bank system might well be used 

for unemployment insurance. Mr. Berle apparently was not familiar with the Wagner- 
Lewis bill but when this was explained to him he felt that it might prove a way out. 
Any unemployment insurance system adopted should be put into operation at once, 
both to give new hope to the unemployed and to bring in new revenue badly needed to 

take care of the large numbers of people to be cared for at this time. . . .— 

In this, the darkest point of the New Deal, at the moment in which 
other countries had terminated constitutional regimes, the first 
successful capital-intensive-led political coalition in history began 
dramatically to come together. 

As national income continued its gradual rise, John D. Rockefeller 
Jr. and his attorney, Raymond B. Fosdick, voted a special grant from 
the Spelman Fund to pay staff of the Industrial Relations Counsellors 
while they worked on social welfare legislation within federal 
agencies. Then the capital-intensive big business members of the 
Commerce Department’s Business Advisory Council, led by Walter 
Teagle of Standard Oil and Gerard Swope of General Electric, joined 
leaders of the Taylor Society on an advisory committee whose task 
was the preparation of the Social Security Act. Backed by Aldrich, 
Harriman, Thomas Watson of International Business Machines, 
George Mead of Mead Paper, the Filenes, and a huge bloc of retailers 
and other corporations, the group subcontracted preparation of the 
bill to Industrial Relations Counsellors (where Teagle and Owen D. 
Young, the board chairman of General Electric, were, or within 
months became, trustees). With slight changes, that bill, with its 
savagely regressive tax on payrolls, became the law of the land.— 

Almost simultaneously, the decisive legislative struggle over the 
Wagner National Labor Relations Act came to a climax. Throughout 
1934 strikes and work stoppages had mounted. In June 1935, the 
National Recovery Act was due to run out, threatening to leave the 
country without any machinery for processing class conflicts.— 

As Armageddon approached, the conservative American 
Federation of Labor (AFL) was becoming increasingly desperate. 
Roosevelt had fairly consistently sided with business against it, and 
the federation was increasingly divided and rapidly losing control of 
its own membership. AFL memoranda of the period show that top 
union officials were convinced that without a new labor relations law 
they were going to be destroyed.— 

But while many big business executives were sympathetic to the 
strongly conservative union’s plight (Alfred P. Sloan, for example, 
wrote frankly that the AFL had to be preserved because it constituted 

a bulwark against Communism),— they adamantly opposed any 
extension of the legal rights of unions. Caught between the warring 
groups, Robert Wagner, the senator from New York, the most 
perfectly representative capital-intensive state in America, began 
searching for compromise while Edward Filene’s Twentieth Century 
Fund opened a special inquiry. Working closely together, the fund 
and Wagner began considering alternatives. Shown drafts of a 
proposed bill, the general counsels of U.S. Steel and most other 
industries shifted into open opposition. Teagle and Swope, however, 
began meeting with Wagner. What happened next is too complex to 
be fully described here. All that can be said is that attorneys for the 
AFF pressed the Twentieth Century Fund for a stronger bill; Wagner 
took some amendments Teagle and Swope proposed to the sections 
defining unfair labor practices; a number of mostly Northeastern 
textile and shoe firms, which were hoping to stop the flow of jobs to 
the South, promoted the legislation; and Twentieth Century Fund 
trustees (which included not only Edward Filene but important 
members of the Taylor Society and several other major business 
figures) joined Mead, several tobacco executives, probably Swope, 
and perhaps Teagle, in endorsing the bill. The fund then assisted the 
lobbying effort, arranging testimony and helping to defray some of 
the costs Wagner was incurring.— 

Almost at the same instant, Roosevelt turned sharply away from 
the proposals for more inflation and stronger federal control of 
banking advanced by the Committee for the Nation and major farm 
groups. For some time the administration had been buying silver (to 
the great satisfaction of Western senators from silver-producing 
states, Shell, and silver speculators the world over) but holding the 
dollar firm against the pound. After ferocious infighting, the 
administration now accepted a compromise Federal Reserve Act of 
1935.- The measure contained provisions (ardently promoted by 
Chase President Aldrich, who played a key role in the final 
negotiation) reconfirming the separation of investment from 
commercial banking. It also confirmed the supremacy of the board of 
governors in Washington over the New York Federal Reserve and the 
other regional banks, as the Bank of America and other leading non- 
New York banks (including the chain controlled by Fed Chairman 
Marriner Eccles) had long desired. 

Only days later, as Democratic Party leader James Farley collected 
cash contributions from oil companies, Roosevelt overruled Interior 

Secretary Harold Ickes and established a compromise oil price 
control scheme. With its implementation, the most important 
American capital-intensive industry achieved near-complete price 
control for a generation. 

The powerful appeal of the unorthodox combination of free trade, 
the Wagner Act, and social welfare was evident in the 1936 election. 
A massive bloc of protectionist and labor-intensive industries formed 
to fight the New Deal. Together with the House of Morgan (which 
had reasons of its own to oppose Roosevelt), the DuPonts recruited 
many of these firms into the Liberty League. They were joined by 
some firms hoping to find a Republican candidate to run a milder 
New Deal. 

But Standard Oil could not abide Alf Landon, who had once been 
in the oil business as an independent in Kansas. On the eve of the 
Republican Convention, Standard Oil dramatically came out against 
him.— In addition, a furious battle raged in the Republican camp 
over Hull’s reciprocal trade treaties. Landon, who was at that 
moment surrounded by advisers from major banks, including James 
Warburg and figures from both Chase and Morgan, originally 
favored them. But the Chemical Foundation and many industrialists 
were bitterly opposed. At the Republican convention the latter group 
prevailed during the writing of the platform. For a few weeks 
thereafter, however, it appeared that the free traders would 
nevertheless win out. Landon repudiated that part of the platform 
and ran as a free trader.— 

But the protectionists did not give up. Organizing many businesses 
into the “Made in America Club” and backed by Orlando Weber of 
Allied Chemical and other top executives, Chemical Foundation 
President Garvan and journalist Samuel Crowther, author of a book 
called America Self-Contained who enjoyed close ties with many 
businessmen, began kamikaze attacks to break through the cordon of 
free-trading advisers who were attempting to wall off Landon. 
Eventually they succeeded in getting their message through: 

On the foreign trade and gold, Landon was extremely interested and he gave no 
evidence of ever before having heard of either subject. [Olin] Saxon had not gone into 
the gold question and, in a general way, seemed to size up like the ordinary economist 
—that is, as having learned nothing that was not in his textbooks. However, 
[Chemical Foundation advisor and farm leader] George Peek went back and forth over 
this subject, in terms of Landon’s own business, and Landon seemed thus to get a 
grasp of what it was all about. Saxon also wanted to go a great deal further into it. 

Peek hammered the subject of the tariff and of our whole foreign trade program and, 
although he could not say positively that Landon accepted it as his paramount issue, 
he did believe that by the time he left, Landon had begun to realize something and that 
he would go further. He was not so certain as to Saxon, who is more or less of the 
orthodox economic type, but he felt there had at least been an awakening. Saxon 
agreed that, whatever the merits of stabilization, the first movement must be to get at 

American money and not to take an excursion into international stabilization.^-^ 

Though Warburg and the other bankers repeatedly warned him 
against it in the strongest possible terms, Landon began to waver. In 
mid- and late September his campaign began to criticize Hull’s 

His attacks alienated many multinationalists, who had watched 
with great interest Roosevelt’s effort to stabilize the dollar. When, 
after speeches by First National’s Leon Fraser and others, Roosevelt 
opened negotiations with Britain and France, the New Deal began to 
look like a good deal to them. It became still more attractive when 
the Tripartite Money Agreement was announced in September and 
after the Roosevelt administration raised reserve requirements on 
bank deposits, as many bankers had been demanding. As Landon’s 
attacks on the trade treaties increased (but, be it noted, while many 
of his polls were holding up, including the Literary Digest’s, which 
had never before been wrong), a generation of legendary American 
business figures began backing out of the Republican campaign. On 
active service in war and peace, Henry Stimson, who had already 
backed the treaties, refused to support Landon and withdrew from 
the campaign. On October 18, as spokesmen for the Rockefeller 
interests debated issuing a veiled criticism of the Liberty League, 
came the sensational announcement that James Warburg, who since 
his noisy public break with FDR two years before had waged 
unremitting war on the New Deal and frequently advised Landon, 
was switching to Roosevelt out of disgust with Landon’s stand on the 
trade treaties. Only a couple of days after Warburg released his 
rapturous public encomium to Hull, Dean Acheson, Warburg’s friend 
and former associate at the Treasury Department, did exactly the 
same thing. So did cotton broker William Clayton, who also resigned 
from the Liberty League. 

On October 29, 

at a mass meeting in the heart of the Wall Street District, about 200 business leaders, 
most of whom described themselves as Republicans, enthusiastically endorsed . . . the 
foreign trade policy of the Roosevelt Administration and pledged themselves to work 

for the President’s reelection. 

After addresses by five speakers, four of whom described themselves as 
Republicans, the Meeting unanimously adopted a resolution praising the reciprocal 
trade policy established by the Roosevelt Administration under the direction of 
Secretary of State Cordell Hull. . . . Governor Landon’s attitude on the reciprocal tariff 
issue was criticized by every speaker. They contended that if Landon were elected and 
Secretary Hull’s treaties were revoked, there would be a revolution among 


conservative businessmen.- 1 - 1 ^ 

While the Republicans switched, the Democrats fought. The Bank 
of America and New Orleans banker Rudolph Hecht, who was just 
coming off a term as president of the American Bankers Association, 
bulwarked the “Good Neighbor League,” a Roosevelt campaign 
vehicle. Lincoln and Edward Filene supported the president to the 
hilt, as did sugar refiner Ellsworth Bunker, a major importer from the 
Caribbean. Weinberg of Goldman, Sachs came back into the 
campaign and raised more money for Roosevelt than any other single 
person. Behind him trailed a virtual Milky Way of non-Morgan 
banking stars, including Harriman of Brown Brothers Harriman; 
Forrestal of Dillon, Read; and probably Hancock of Lehman 

From the oil industry came a host of independents, including Sid 
Richardson, Clint Murchison, and Charlie Roesser; as well as 
Deterding, Moffett of Standard Oil of California, W. Alton Jones of 
Cities Services, Standard Oil of New Jersey’s Boris Said (who helped 
run Democratic youth groups), and M. L. Benedum of Benedum- 
Trees. Top executives of Reynolds Tobacco, American Tobacco, 
Coca-Cola, International Harvester, General Electric, Zenith, IBM, 
Sears Roebuck, ITT, United Fruit, Pan Am, and Manufacturers Trust 
all lent support. Prodded by banker George Foster Peabody, the New 
York Times came out for Roosevelt, as did the Scripps-Howard 


In the final days of the campaign, as Landon furiously attacked 
social security, Teagle of Standard Oil of New Jersey, Swope of GE, 
the Pennsylvania Retailers Association, the American Retail 
Federation, and Lorillard tobacco company (Old Gold), among 
others, spoke out in defense of the program. Last, if scarcely least, the 
firm that would incarnate the next thirty years of multinational oil 
and banking, the Chase National Bank, loaned the Democratic 
National Committee one hundred thousand dollars. 

The curtain fell on the New Deal’s creation of the modern 

Democratic political formula in early 1938. When the United States 
plunged steeply into recession, the clamor for relief began again as it 
had in 1933. Pressures for a revival of the NRA also mounted. But 
this time Roosevelt did not devalue the dollar. With billions of 
dollars in gold now squirreled away in the Fed, thanks to 
administration financial policies and spreading European anxieties, 
early 1930s’ fears of hoarding and runs on gold had vanished. As a 
consequence, reflation without formal devaluation or a revival of the 
NRA became a live option. Rockefeller adviser Ruml proposed a plan 
for deficit spending, which Roosevelt implemented after versions won 
approval from Teagle and nearly all the important bankers, including 
Morgan. Aldrich then went on NBC radio to defend compensatory 
spending from attacks, as long as it was coupled with measures for 
free trade (to the great annoyance of the DuPonts). Slightly later, the 
State Department, acting in secret with the Chase National Bank, and 
in public with the Roman Catholic cardinal of Chicago and high 
business figures, set up a committee to promote renewal of the 
Reciprocal Trade Act in the wavering Corn Belt. 1 They were 
successful. National income snapped back and the multinational bloc 
held together. As it would be through most of the next generation, 
the national Democratic Party was now committed: it was the party 
of the “people”—and of internationalism and free trade. 


In a longer analysis it would be desirable to distinguish various stages 
in the transformation of the Second New Deal into an organizing 
principle in American politics—through World War II, the “Fair 
Deal,” and the Cold War, for example. It would also be important to 
analyze more extensively how class conflicts rose and ebbed during 
this period, as well as how some of the secondary tensions discussed 
earlier, notably those involving investment and commercial banking, 
were finally resolved. One would also want to look more carefully at 
the vicissitudes of Hull’s trade policy, especially in regard to cotton 
textiles, the fate of agriculture, and the changing role of the Supreme 
Court (where the chief justice chanced to be Standard of New Jersey’s 
former top policy adviser). Nevertheless, even this abbreviated 
presentation establishes several important points of both substance 
and method. 

First of all, it should make plausible the claim that by at least late 
1938 all the elements of what deserves recognition as a distinct 
System of ’36 were, at least provisionally, in place—social welfare, oil 
price regulation, free trade, even “Keynesianism.” Though all of these 
measures except the fixed price for oil still drew massive, well- 
financed opposition, the logic of their combination into a powerful 
and immensely popular political coalition was now apparent. 

No less important, this analysis specifies far more precisely the role 
labor (and a few radicalized farm and professional groups) played in 
shaping the New Deal. While the “labor constraint” analysis that is 
part of the static theory of industrial partisan preference does not 
pretend to explain surges in labor militancy (note that the model says 
nothing at all about why these occur), its implicit cost-benefit 
framework allows one to understand—indeed, anticipate— 
differential responses to these challenges by various industries. It 
thereby becomes a formal way of integrating independent initiatives 
by labor, such as those well described in Piven and Cloward’s Poor 
People’s Movements , into a more complex model of divisions within 
the business community.— 

Also, of course, the analysis indicates the inadequacy of traditional 
approaches to the politics of business. To understand the New Deal, I 
have argued, one must thrust aside the hoary models of “big vs. 
small” business (or “monopoly vs. competitive” capital). One has to 
recognize that related but distinct lines of cleavage ultimately divided 
big business in that period: the division between labor- and capital- 
intensive industries on one hand, and between nationalists and 
internationalists on the other. And the financial system’s sometimes 
very complex effects on political coalitions have to be elucidated in 
detail, as one must also be wary of the sometimes dramatic effects of 
big swings in national income.— 

Finally, this study has implications for many working procedures 
in contemporary politics. First, it should suggest how much material 
about political events remains to be discovered in archives. The New 
Deal is one of the most extensively discussed phenomena in American 
history. Yet plenty of gaps have remained about who exactly did 
what precisely when. When these gaps begin to be filled in, quite a 
different picture emerges of what once seemed the “facts” of 
legislative draftsmanship and political initiative. 

Political analysis can benefit from a more thoroughgoing 
integration with economic analysis. This does not, of course, imply 

acceptance of the view that most people maximize income (or 
wealth), or that cultural factors do not importantly affect political 
outcomes.— It does demand, however, that the analyst try to trace 
in detail how industrial structures link to society and politics, and 
how factors like falling income might explain what he or she is 
interested in. Otherwise one is likely prematurely to invoke one of the 
various dei ex machina now fashionable in the more affluent parts of 
comparative politics, such as “autonomous” (which often means 
“inexplicable”) state bureaucrats, nebulous “national” interests, or 
“thick descriptions” of irrelevant facts. And one will thus miss the 
sovereign reality of the New Deal’s “multinational liberalism”: that 
the decisive support for a political coalition that strongly accented 
“comparative advantage” came from the ranks of the comparatively 


This chapter summarizes part of the argument of my Critical 
Realignment: The Fall of the House of Morgan and the Origins of the 
New Deal (New York: Oxford University Press, forthcoming) and 
sharpens considerations advanced in “Von Versailles zum New 
Deal,” a catalogue essay in Neue Gesellschaft fur Bildende Kunst, 
Amerika: Traum und Depression 1920/40 (Berlin and Hamburg: 
1980), pp. 436-50. To reduce documentation to manageable 
proportions, I have strictly limited references to no more than are 
absolutely necessary for precision of argument. 

The same space limitations make it impossible to acknowledge all 
who have aided my research. For very helpful comments on drafts of 
this chapter, however, I should like to thank Lawrence Goodwyn, 
Charles Kindleberger, James Kurth, Mira Wilkins, the members of 
Harvard University’s Economic History Research Seminar, and the 
editors of International Organization. I am also very grateful to 
Alfred Chandler both for comments and for affording me a look at 
two unpublished papers on the evolution of big business (“Global 
Enterprise: Economic and National Characteristics—An Historical 
Overview,” and “The M Form—Industrial Groups, American 

For providing me with unrestricted access to his personal papers 
and unique insights into the New Deal, I am grateful to a leader of 
the independent oilmen in Texas during the New Deal, Mr. J. R. 

Parten, now of Madisonville, Texas. For other assistance in securing 
material I also thank Mr. and Mrs. Everett Case, Anthony Garvan, 
Mr. and Mrs. John W. Coolidge Jr., Herbert Gintis, Charles Harvey, 
and Mrs. Rene Leon. Other valuable assistance came from Walter 
Dean Burnham, Bruce Cumings, Gerald Epstein, Henry Farber, Peter 
Gourevitch, Robert Johnson, Lola Klein, Duane Lockard, Martin 
Shefter, Peter Temin, and more librarians than can be named here. 


Monetary Policy, Loan Liquidation, and Industrial 
Conflict: The Federal Reserve and the Open Market 
Operations of 1932 


... in the United States the fear of the Member Banks lest they should be unable to 
cover their expenses is an obstacle to the adoption of a wholehearted cheap money 

J. M. Keynes, September 1932- 

IN THE SUMMER of 1929, output and employment in the 
American economy began falling. After the stock market crashed in 
late October, the decline turned into a catastrophic rout. By mid- 
1930, the United States, along with many other countries, was clearly 
sliding into deep depression. Yet the Federal Reserve System, widely 
trumpeted in the 1920s as the final guarantor of financial stability, 
did very little to offset what soon developed into the greatest 
deflation in American history. 

For two long years the Fed maintained its posture of Jovian 
indifference. On occasion the New York Fed promoted very modest 
increases in liquidity; discount rates were lowered and flurries of 
open market purchases occurred, but nothing more. 

In the spring of 1932, however, the Fed abruptly came to life. 
Following passage of a new banking law, the Glass-Steagall Act of 
1932, which liberalized collateral requirements for Federal Reserve 
notes, the Fed seemed poised for a dramatic effort to break the 
deflationary cycle.= As one eyewitness, who enjoyed special access to 
top Fed officials during this period, recalled many years later: 

The Federal Reserve Bank’s experts, meanwhile, attempted their own cure by 
monetary controls aimed at expanding the supply of money. The strategy of “open 
market” purchasing of bonds by the Federal Reserve Banks had been used earlier; but 
now it was employed on a gigantic scale by [New York Fed Governor George L.] 
Harrison, who headed the Open Market Committee for the country’s twelve Reserve 
Banks. Under the new banking rules, he had one billion dollars more in gold available. 
With these funds he began to buy $100 million in U.S. government bonds every week 
during ten successive weeks up to May, 1932, by which date a hoard of $1.1 billion in 

bonds was accumulated. These transactions, of a size unequalled in the history of any 

central bank, put cash in the hands of the Reserve’s member banks and were expected 

to form the basis for the expansion of loans or investment in the ratio of 10 to 1.- 

But the campaign ended almost as quickly as it began. In the 
summer of 1932, the Fed effectively abandoned the new policy. A 
few months later, like millions of other Americans, Herbert Hoover 
lost his house. Soon thereafter another wave of bank failures began. 
Eventually the entire financial system of the United States collapsed 

Ever since those dark days, debates have raged over the Fed’s 
policies.- Little of this new work, however, has analyzed the Federal 
Reserve System’s shortlived attempt in early 1932 to reflate the 
economy through open market operations. Yet, as we will 
demonstrate, a reconsideration of the Fed’s actions in the period 
raises searching questions about the most widely accepted 
explanations of the Fed’s behavior in the Depression. We highlight 
the potentially disastrous consequences of one of the Fed’s most basic 
structural characteristics: its dual responsibility for both the health of 
the member banks and the welfare of the economy as a whole. 


Among the recent works addressing the question of what the Fed 
thought it was doing are those by Friedman and Schwartz; Wicker; 
and Brunner and Meltzer. Their accounts of the 1932 episode can be 
compared by contrasting the answers each provides to three 
questions. Why did the Fed wait so long to begin its reflation 
program? Why did the campaign begin when it did, in early 1932? 
Why was the effort hastily abandoned the following summer? 

Friedman and Schwartz offer explicit answers to each of these 
queries. Three reasons, they believe, explain why the Fed was 
reluctant to move against the Depression before 1932. The first is the 
untimely death in 1929 of the Fed’s dominating personality, New 
York Federal Reserve Bank Governor Benjamin Strong. What made 
his demise so significant were the other two factors Friedman and 
Schwartz stress: the Fed’s weak, decentralized organizational 
structure and the absence within the Federal Reserve System (save for 
the New York Fed) of a broad “national” point of view. “Parochial” 
and “jealous of New York,” the regional banks were “predisposed to 
question what New York proposed.” Their reluctance to cooperate 

increased turmoil in the Fed and made bold action impossible. ' 

Flatly denying that most Fed officials harbored any desires to 
reflate on their own, Friedman and Schwartz argue that pressure 
from Congress explains the timing of the open market operations of 
1932. The close of the congressional session, they suggest, freed the 
Fed from these pressures and accounted for the tapering off of the 
program in the summer of 1932. 

Wicker’s account is less clearcut. In different parts of his work he 
mentions various factors, including a failure by most of the Fed’s 
directors and officials “to understand how open market operations 
could be used to counteract recessions and depressions,” and a 
concentration on short-term rates “to the neglect of member bank 
reserves and the money supply.”- Unlike Friedman and Schwartz, 
who downplay international considerations, Wicker refers frequently 
to the Fed’s anxiety about the international gold standard and, at 
least occasionally, free gold. Although Wicker does not focus on 
what caused the Fed to begin the open market operations, he is clear 
on why the Fed abandoned them: Fed officials misinterpreted the 
meaning of the accumulation of excess reserves, and considered 
monetary policy easy. 2 

Brunner and Meltzer do not specifically discuss the 1932 reflation 
and, as discussed below, large-scale open market purchases are 
precisely what their theory of Fed behavior does not predict. But if 
their account thus affords no answer to the second of our three 
questions (why the open market operations began), it is easy to 
reconstruct implicit answers to the other two questions from their 
general account of the Fed in this period. Their discussion focuses on 
the latter point mentioned by Wicker, the misinterpretation of excess 
reserves and short-term rates. They argue that the severe deflation of 
the early 1930s made nominal interest rates unusually poor guides to 
real interest rates.- With severe deflation, low nominal rates 
represented a comparatively high real rate. During much of the 
Depression, and particularly in the summer of 1932 when nominal 
rates were quite low, the Fed may simply have misinterpreted 
conditions in the money market; it believed real rates were low, when 
they in fact were high. 

Brunner and Meltzer also argue that the reigning Fed doctrine on 
open market operations, referred to as the “Riefler-Burgess-Strong 
framework,” led the Fed astray. The doctrine, they assert, not only 

failed to distinguish nominal from real rates, but also upheld the 
“real bills” theory, according to which bank lending for actual trade 
(real bills) represented the only acceptable asset for rediscount by 
central banks.- 

Each of these accounts clarifies vital points. But we cannot accept 
any of them as definitive. For example, all place heavy weight on 
policy errors, mistaken theories, and, in the case of Friedman and 
Schwartz, and Wicker, personalities. Yet, not only the Fed, but 
virtually all other central banks failed to move vigorously against the 
Depression. How far can one press an argument that a deceased 
Benjamin Strong was responsible for all of this? 

The assumptions and claims in the literature about targets and 
indicators relied upon by the Fed during this period are also 
problematic. The claim of Brunner and Meltzer, and Wicker that the 
Fed did not understand the difference between real and nominal rates 
relies on an implication that is difficult to believe: that bankers were 
unable to see that real interest rates were high but that the 
industrialists, who joined them on the boards of the Federal Reserve 
banks, were. (That is why they did not borrow, according to the 
argument.) References to the real-nominal distinction among top 
bankers, economists, and leading members of the Federal Reserve 
System were also far more common than the work of Brunner and 
Meltzer suggests. Material in the Fed’s archives indicates that, at least 
in the 1930s, neither Burgess nor Riefler subscribed to the doctrines 
bearing their names.— 

Direct evidence of a relationship between real bills and Fed 
behavior is also weak. Our own statistical tests failed to confirm 
earlier views of the influence of short-term interest rates on Fed 
policy, while a continuation of Meltzer’s own table relating changes 
in the gold stock, member bank borrowing, and interest rates on 
three-month to six-month notes to Fed decisions on open market 
operations past his mid-1931 cutoff point shows that the Fed 
repeatedly ignored the signals sent by member bank borrowing.— 

Friedman and Schwartz’s account of the making of monetary 
policy in this period raises other questions. It emphasizes domestic 
concerns and underestimates the role international economic 
considerations, especially a concern for protection of the gold stock 
and maintenance of the gold standard, played in the making of policy 
throughout most of the period of 1929 to 1932. As we will explain 

below, although Friedman and Schwartz are correct in claiming the 
passage of the Glass-Steagall Act of early 1932 temporarily alleviated 
the free gold problem for the Federal Reserve System as a whole, they 
are mistaken in dismissing both gold and the international economy 
as constraints thereafter. 

To see how the international economy affected Fed policy after the 
Glass-Steagall Act of 1932, however, it is necessary to break with the 
tradition of analyzing the Fed’s actions in terms of their effects on 
broad categories, such as the total gold stock, the balance of 
payments, or the national income. One must look in detail at the 
microeconomics of the banking sector to identify how various actions 
of the Fed potentially affected bank profitability at different points in 
time. If, following Stigler, Posner, and other recent analysts of the 
symbiosis of regulator and regulated, one gathers evidence on the 
policy preferences of private bankers and their interaction with the 
regulators, we find a ready answer to our three central questions 
about the Fed’s open market program of 1932.— 


Our principle concern is the behavior of the Federal Reserve System 
between January and July 1932, and thus we concentrate on 
answering the last two of the three questions. Responding to the first 
query, why the Fed waited so long to act, however, requires a glance 
backward at Fed policy in earlier stages of the Great Contraction. 

Between October 1929 and April 1931, industrial production fell 
by 26 percent, while the monetary base declined by 90 million 
dollars. In the period it is clear that the Fed did not pursue an activist 
policy to revive the economy, but some differences occasionally 
developed in the approaches various reserve banks took to manage 
the deflation. 

Immediately after the stock market crash, for example, the New 
York Fed purchased $160 million of government securities and 
encouraged the New York banks to discount freely. During the next 
year and a half, the New York Fed pressed for reductions in discount 
and acceptance rates. Opposition from the board of governors and 
the other reserve banks, however, generally delayed or reduced the 
impact of these measures.— 

But, if the New York Fed generally favored easier money than the 
rest of the Federal Reserve System, it did not advocate large-scale 

reflation. New York Fed Governor Harrison’s report of the open 
market policy conference to the governor’s conference on April 27, 
1931, for example, clearly repudiated the notion of an active 
countercyclical policy.— 

Why was the New York Fed more expansionary than other reserve 
banks, and why did no one seriously try to revive business? The 
answer to the first question surely relates to the important connection 
between the New York commercial banks and the stock market (or 
perhaps, the banker directors of the New York Fed, many of whom 
were later shown to have been in some distress in this period). — 

The reasons for the lack of interest in more expansionary policies 
are more interesting and can be pieced together from primary sources 
and our statistical investigation, Archival sources make a point which 
is obvious in retrospect, but which later accounts do not take 
seriously enough: Conventional doctrine among businessmen, 
bankers, and economists in the period held that occasional 
depressions (or deflations) were vital to the long-run health of a 
capitalist economy. Accordingly, the task of central banking was to 
stand back and allow nature’s therapy to take its course. As one well- 
known voting member of the Fed’s board of governors, Treasury 
Secretary Andrew Mellon, expressed it, the way out of a depression 
consisted of a sustained effort to “liquidate labor, liquidate stocks, 
liquidate the farmers, liquidate real estate.”— In private discussions 
among bankers, economists, and Fed officials, the need to compel 
liquidation was a common topic of conversation. Reasons given 
included correcting the mistakes of businessmen, curbing the 
excessive spending of governments, and especially, reducing the 
wages of labor.— 

Among industrialists and high government officials, faith that wage 
reductions would eventually revive prosperity was less strong than 
among bankers. After the stock market crash, for example, President 
Hoover made several highly publicized efforts to promote work 
sharing and discourage wage cuts. His efforts were backed strongly 
by a number of major industrialists in predominantly capital- 
intensive industries, including the heads of Standard Oil of New 
Jersey and AT&T. In the end, however, the campaign did not 
amount to much. Petering out as the Depression grew worse, it failed 
to move the Fed. - 

Their inability to move the Fed led the industrialists either to give 

up and join the bankers in calls for wage reductions or to influence 
Congress in favor of legislated directives for monetary expansion. 
Hoover, who left to himself would probably have moved more 
vigorously against the Depression than has been presumed, in 
practice gave in to pressures from the banks, especially J. P. Morgan 
& Co., and the Treasury. — 

Though Friedman and Schwartz argue that in the period free gold 
and the gold standard were not major concerns of the Federal 
Reserve Board, we believe they are mistaken. Their narrative, for 
example, alludes to a memorandum from a January 1931 meeting of 
the Federal Reserve Board. Yet at the conference, many participants 
were deeply concerned with gold. Fed economist E. A. Goldenweiser, 
for example, reports that “There was a good deal of discussion about 
free gold. Anderson had made a statement that free gold was down to 
$600,000,000, and we were, therefore, nearer to the time when credit 
policy would have to be guided by the availability of gold.” To which 
A. C. Miller of the Federal Reserve Board bluntly replied that 
“purchases of securities by diminishing free gold are a dangerous 

Although convertibility remained axiomatic to everyone in the 
banking system, real bills did not. Some top Fed officials seem to 
have subscribed to this doctrine. - But many Fed officials and 
bankers (especially in New York) actively promoted the removal of 
the extra constraints on free gold imposed by existing limitations on 
the definition of the “eligible paper” acceptable as backing for 
Federal Reserve notes. Goldenweiser observed to the Federal Reserve 
Board in early January 1930, “My own view is that collateral 
provisions are obsolete and unnecessary.”— His statement counts 
heavily against Brunner and Meltzer’s argument on the importance of 
the real bills doctrine as an explanation of Fed behavior. The 
collateral provisions associated with the definition of free gold were 
one of the major embodiments of the real bills doctrine in the Federal 
Reserve System. 

The desire to force wages down, intermittent anxiety about gold, 
and (to a lesser extent) the belief of some in real bills, probably 
account for most of the Fed’s inactivity until the fall of 1931.— An 
event then occurred which explains the Fed’s inaction throughout the 
rest of 1931 and the timing of its belated reflation efforts in early 
1932. That event was the British abandonment of the gold standard 

in September 1931. 


Friedman and Schwartz, who deemphasize international factors in 
their account, agree that the desire to remain on gold controlled Fed 
policy in the next few months. The run on the dollar that followed 
Britain’s announcement that it was leaving gold resulted in a heavy 
gold loss for the United States. From September 16 to September 30, 
1931, the U.S. gold stock declined by $275 million. In October it 
decreased by an additional $450 million. The losses just about offset 
the net influx during the preceding two years.— 

For a brief time Harrison and the New York Fed hoped to avoid a 
sharp rise in the discount rate, but experience in the first few weeks 
persuaded everyone in the Federal Reserve System that the time had 
arrived to apply the classic remedy for halting a run on gold. In two 
weeks the Fed raised the rate by 2 percentage points, the sharpest rise 
in such a brief period in the Fed’s history. It also halted all 
expansionary open market operations. 

The benefits of this policy were predictable: The run on the dollar 
halted; gold outflows ceased and then began to reverse. But its costs 
were no less obvious and foreseeable: There were massive new waves 
of deflation, business bankruptcies, and bank failures. 

The chorus of voices demanding reflation swelled, and calls for 
public works expenditures, veterans’ benefits, government-sponsored 
cartelization of industry, and other forms of market intervention 
proliferated. As Friedman and Schwartz suggest, many of the new 
pressures found expression in Congress, where bills mandating 
various forms of monetary expansion, including one coauthored by 
Irving Fisher, were introduced. - 

All the tumult certainly worried the Fed and the banking 
community at large. The banks, however, had major worries of their 
own. The rise in the discount rate sent bond prices plunging, even 
triple-A bonds. The collapse of bond prices threatened the solvency 
of many banks.— 

With many large banks facing the potential of trouble, many 
leading bankers joined veterans, industrialists, and farmers in calling 
upon the Fed for action. A few financiers, including several Morgan 
partners, advocated expansionary monetary policies explicitly for 
macroeconomic reasons.— Most bankers, however, appear to have 

been dubious or uncomprehending about the macroeconomic case for 
reflation. But at this juncture it hardly mattered, for with runs on 
banks, hoarding, and other threats to deposits developing, most 
banks had a desperate need for action by the Federal Reserve to 
revive the almost defunct bond market and to restore liquidity.— 

Unable for several months to do anything with monetary policy 
(because their sovereign commitment to gold left them no choice but 
to support discount rate increases), leading bankers began 
consultations with Hoover’s Treasury Secretary Ogden Mills (who 
had replaced Andrew Mellon), Fed Chairman Eugene Meyer, and 
other top officials. Led by Thomas W. Lamont of J. P. Morgan & 
Co., they evolved a plan for a private “National Credit 
Corporation.” The NCC, however, had one drawback: It was 
“National” in name only. Actually, it functioned as a bank bailout 
fund, operating on capital privately supplied by leading bankers, 
which exposed them to possible losses. As soon as the run on gold 
abated in the last couple of months of 1931, Lamont, other private 
bankers, Hoover, Mills, and high Fed officials gradually evolved new 
and different plans.— 

The new program was represented to the open market policy 
conference in early January 1932. Standard accounts of the Fed in 
this period accurately present five of the six points in the plan “to 
stop deflation and encourage some credit increase.” These five are: 
(1) passage of the Reconstruction Finance Corporation, (2) Federal 
Reserve and member bank cooperation with the Treasury program, 
(3) the buying of bills when possible, (4) the reduction of discount 
rates, and (5) the purchase of governments. The remaining point is 
usually reported as “support for the bond market.” In the minutes it 
reads “organized support for the bond market predicated upon 
railroad wage cuts.”— 

Thus a major goal of the program was to revive railroad bond 
values, of which major New York banks held $200 million, 
comprising a third of their private bond portfolios in December 
1931, and bond prices in general. Private bankers and the Federal 
Reserve saw wage cuts as a necessary condition to reviving those 
values. By reviving the bond market the Federal Reserve hoped to 
regenerate the savings and investment process and revive the banks. 

Another component of the program, hidden in the January 
minutes, appears in a memorandum from W. Randolph Burgess to 
Harrison: “most of the points of our January program have now 

been achieved: rail wages have been reduced, the administration had 
made a definite commitment on balancing the budget, the 
Reconstruction Finance Corporation is in operation, and the bond 
pool has been operating—though feebly. Everybody else has done the 
tasks assigned to him, but the reserve system. ...” Burgess adds, 
“there was a very good reason for not doing so, and that was the 
limited amount of our free gold in the face of European gold 

Though Friedman and Schwartz discount it, Fed memoranda 
during the period show that free gold did handicap the Federal 
Reserve System for several months. After massive lobbying by the Fed 
and private bankers, however, Congress passed the Glass-Steagall 
Act.— The new law permitted government securities to be used as 
backing for Federal Reserve notes, thus freeing additional gold for 

Keeping careful watch on critical variables (the gold stock, excess 
reserves, free gold, foreign balances, and bank suspensions), the Fed 
commenced open market operations.— In a memorandum prepared 
for an April 5 meeting of the executive committee and the board of 
governors, Harrison reported that “the program . . . has been even 
more successful than could well have been hoped for at that time, as 
member bank indebtedness has been reduced by more than 
$ 200 , 000 , 000 .”— 

At that meeting, Harrison “reviewed the current economic 
situation, the continued decline in prices, the increase in the pressure 
of debts, the increase in bankruptcies, and the threat of radical action 
in Congress. . . . After extended discussion of these questions it was 
moved and carried that purchases of government securities be 
continued at a rate of $25,000,000 a week.— The mention of “the 
increase in the pressure of debts” after “the continued decline in 
prices” suggests that, contrary to Brunner and Meltzer, Harrison was 
aware of the effects of falling prices on the real value of debt. 
Harrison’s allusion to congressional pressure also confirms Friedman 
and Schwartz’s suggestion that this factor was a concern at the Fed. 
But the reference also sets this factor in its proper context as but one 
among several figuring in the decision to reflate. 

At an April 12 meeting, Treasury Secretary Mills, Fed Chairman 
Meyer, Miller of the board, and Harrison urged the Fed’s Board of 
Governors to approve a major increase in the scale of open market 

purchases. Mills asserted that “[f|or a great central banking system to 
stand by with a 70% gold reserve without taking active steps in such 
a situation was almost inconceivable and almost unforgiveable.” 
Harrison explained the delay in moving toward an expansion 
program after the passage of the Glass-Steagall Act as the effect of 
“[t]he uncertainty as to the budget and bonus legislation [which] had 
constituted obstacles to inaugurating such a program, but he believed 
that the outlook in these directions was hopeful, and that it would 
not be possible or necessary to wait until these questions were 
completely solved.”— 


By this time, however, serious opposition to the program had 
surfaced among the reserve banks and on the board of governors. 
Governor J. B. McDougal of Chicago had strongly opposed it 
virtually from the beginning. In this pre-New Deal period, when 
authority for open market purchases was not as yet vested firmly in 
the board of governors, McDougal’s opposition was very important, 
for his bank was, with the exception of New York, the most 
important in terms of its influence within the Federal Reserve System 
and in terms of the number of securities it could buy.— Often, 
however, Governor Roy Young of the much smaller Boston bank 
supported him, at least to the extent of speaking against the program 
before committing his bank to participating. — 

At the April 12 meeting McDougal and Young questioned the 
program again, and a revealing exchange with Harrison occurred. 
Objecting that as the program continued, reserves would pile up in 
reserve centers, Young allowed that “he was skeptical of getting the 
cooperation of the banks . . . and was apprehensive that a program of 
this sort would develop the animosity of many bankers.” Harrison 
replied, most meaningfully, that in “the present situation the banks 
were much more interested in avoiding possible losses than in 
augmenting their current income, and that their attitude had changed 
gradually since last year in the face of the shrinkage in values.”— 

This exchange between governors provides one of the first clear 
hints of the importance of one of the three major factors that 
eventually led to the abandonment of the whole program. We call it 
the “loan liquidation effect.” 

By the middle of the Great Contraction, bank portfolios in many 

Federal Reserve districts were beginning to assume a curious shape. 
Either because bankers were becoming very wary or because good 
lending opportunities were difficult to find, loans were falling off 
catastrophically. The loan liquidation effect then took hold. As loans 
and many bonds became increasingly risky, bankers looked around 
for ways to maintain earnings. In due course, they began to purchase 
larger and larger amounts of the safest asset that remained available 
in large quantities—short-term government securities. Tables 3.1 and 
3.2 indicate the dimensions of this change. Whereas in 1929 
investments made up less than 30 percent of member bank earning 
asset portfolios, by the end of 1933 they made up almost 50 percent 
(see table 3.1 ). A large percentage of the increase took the form of 
increases in holdings of government securities. 

TABLE 3.1. Ratio of Investments to Loans and Investments For Selected Member Banks 





New York 






























































1932 a 

























1933 a 







Source: Board of Governors of the United States Federal Reserve System, Banking and 
Monetary Statistics (Washington, D.C., 1943), pp. 72, 74, 80, 86, 92, 696. 

a Call dates except for March 1932, 1933, which are linear interpolations since there were no 
call reports for those dates. 

TABLE 3.2. Ratio of Bills and Notes to Total Investments For Selected Member Banks 





New York 























































































1933 a 







Source: Board of Governors of the United States Federal Reserve System, Banking and 
Monetary Statistics (Washington, D.C., 1943), pp. 77, 84, 90, 96, 700. 

a Call dates except for March 1932, 1933, which are linear interpolations since there were no 
call reports for those dates. 

These shifts had important consequences for bank earnings. The 
net return on investments tended to be lower than that on loans.— In 
addition, table 3.2 indicates the banks, especially the reserve city 
banks, bought a sharply rising percentage of short-term securities. 

With expansionary open market operations and reductions in 
nominal income moving short-term rates to extremely low levels 
(rates on three-month to six-month Treasury notes and certificates 
plunged from 3.4 percent in November of 1929 to 0.34 percent in 
June of 1932), a squeeze on bank earnings developed.— Unable to 
obtain capital gains because of the shortness of their portfolios, 
banks had to face diminished earnings as they turned over portfolios 
and as rates on short-term governments fell. 

Of course, rate reductions would not have impaired current 
earnings if rates on the money banks borrowed and other expenses 
had fallen just as rapidly. But while rates on borrowed money did 

decline, there were pitfalls here. In 1932, banks still paid interest on 
demand deposits. As rates paid approached zero, it would become 
increasingly difficult to hold deposits, especially if a run 
materialized.— Even worse, the banks still had to pay expenses, and 
these, especially payments for salaries and wages and “other 
expenses” (which included fees for directors and advisory 
committees), failed to decline as much as earnings in 1932 (and 
several other years). Accordingly, net earnings, before losses , fell 
more or less steadily after 1929. But earnings after losses on loans 
and securities plunged steeply in 1932 and 1933, leading to -$0.89 
and -$1.42 in net profits per $100 of loans and investments in 1932 
and 1933.— 

These developments led to growing opposition to the open market 
campaign in a straightforward manner. Although loan liquidation 
ultimately spread to banks in all Federal Reserve districts, some 
districts were hit much harder than others in 1932. Banks that stood 
to lose the most from declining rates were those with a relatively high 
percentage of short-term debt in their portfolios. Table 3.2 indicates 
that Chicago’s central reserve city banks, the city’s larger banks, had 
a much higher proportion of bills and notes in their portfolios than 
all member banks or all other reserve city banks, and that Boston’s 
reserve city banks were adding short-term governments to their 
portfolios at a breakneck pace between October 1931 and June 1932. 
(Note that Chicago central reserve city banks had double the 
percentage of bills and notes than those in New York through 1931, 
with New York catching up only in the last quarter of 1932 after the 
open market purchases were abandoned; while between October and 
December 1931, reserve city banks in Boston and central reserve city 
banks in New York changed the composition of their portfolios in 
virtually opposite directions.) 

These portfolio changes had important consequences for net 
earnings of member banks by Federal Reserve district. Since earnings 
on the overall portfolios reflected the interest rates on assets 
accumulated in previous months, current security rates would have 
their major effects on portfolio earnings some months after they were 
purchased. So, for example, returns in December of 1932 would 
reflect the interest rates on securities purchased in the summer of 
1932. There were great reductions in net earnings facing banks in the 
Chicago district in the half-year ending December 1932, reflecting the 
earlier decline in interest rates. Their net margin (earnings per $100 

of loans and investments) fell to $0.23 from $0.43 in the period six 
months earlier, which translates into a substantial drop in total 
profits. New York bank earnings margins, on the other hand, still 
held up comparatively well even at this late date, falling only from 
$0.62 to $0.54. The rates for other districts (generally of less 
significance within the system than Chicago or New York) were 
scattered. — 

That the governors of the Boston Fed and, especially, the Chicago 
Fed should be early critics of the reflation program is therefore no 

Opposition on the other grounds was soon registered in minutes 
and memoranda. A memo on open market purchases, April 5, 1932, 
reported that between March 2 and April 6, the Fed had bought 
$130 million of securities. But only four reserve banks participated in 
the open market purchase program directly. Moreover, the Federal 
Reserve Bank of Kansas City had discontinued its participation on 
March 23, “owing to its free gold position.”— 

This reference points to a second reason for the eventual 
termination of the program, what might be termed the growing 
problem of “gold distribution.” As Friedman and Schwartz 
emphasize, especially after the passage of the Glass-Steagall Act, both 
the Federal Reserve as a whole and the New York Fed had more than 
enough gold to meet any conceivable run. But Federal Reserve banks 
in each district still had to maintain a 40 percent gold cover for their 
notes. And here an acute problem began shaping up. The Federal 
Reserve was, after all, only a federal reserve. A series of unresolved 
controversies in the 1920s had led to debates about the Federal 
Reserve Board’s legal authority over individual reserve banks. 
Though it is difficult to be sure, since the issue eventually was settled 
not in court but by New Deal banking legislation, it is doubtful that 
individual reserve banks would have surrendered their gold without 
struggle. (Indeed, under far graver conditions a year later, the 
Chicago Fed flatly refused the New York Fed’s desperate request for 
emergency rediscounting assistance and made the refusal stick.)— 

As a consequence, not only the total amount of gold but its 
distribution among the Federal Reserve banks became important. As 
individual banks lost gold and approached the legal limit for their 
gold cover, they would have to stop participation in the reflation 
program. Over the next few months this happened: Not only Kansas 
City but other reserve banks became more and more nervous about 

running out of their gold. As their nervousness increased, they 
stopped supporting reflation.— 

The last of the three major factors which induced the Fed to 
abandon its open market program also concerned gold. Like the 
question of distribution, however, it has not figured significantly in 
the literature. The problem, at its starkest, was this: At the time the 
open market program began, foreign balances held by American 
institutions amounted to more than $1.2 billion. These sums were 
not distributed evenly throughout the system’s districts, but were 
heavily concentrated in New York (with, probably, lesser amounts in 
Boston and one or two other reserve centers).— Difficulty arose 
because the French (and toward the end, British and other interests) 
withdrew large sums, and the British threatened to withdraw still 
more. That the Federal Reserve System as a whole had reserves that 
more than covered the foreign deposits was all very well. To the big 
New York banks, however, this was academic. It was their deposits 
that were leaving, to the detriment of their earnings and safety. 

In a theoretically perfect world, of course, the deposit loss might 
have been neutralized by continued open market operations. But 
America in 1932 was not a theoretically perfect world. First of all, 
for reasons already discussed, the whole open market program was 
acutely controversial. No New York bank could be sure how long it 
would continue or what the purchases would amount to. In addition, 
the magnitude of foreign deposits involved was large—almost equal 
to the projected total of open market purchases for the system as a 
whole. There was also the possibility that Americans would look at 
the foreign withdrawals and themselves begin fleeing from the dollar, 
especially as the battle over the budget climaxed. 

From the beginning of the open market program, private bankers 
and Fed officials sought ways to minimize losses of foreign gold. It is 
uncertain whether Prime Minister Pierre Laval pledged to maintain 
French deposits when he visited the United States in the fall of 1931, 
but, in any case, the Banque de France soon compelled the Fed to 
agree to their withdrawal. With the faint hope of persuading the 
French to change their minds. Thomas Lamont of J. P. Morgan & 
Co. made a special trip to France in the early spring. For a while, 
Lamont and other bankers believed these efforts might succeed. But 
events gradually proved them mistaken. Encouraged by a series of 
widely discussed articles by H. Parker Willis, an economist well 
known for monetary orthodoxy that criticized the Fed’s program as 

“inflationary,” the Banque de France and other foreign interests 
continued withdrawing deposits from the Fed and other banks. - 

Though Fed officials and bankers worried privately about the lost 
deposits, for a while the losses were bearable. The French withdrew 
most of their deposits, but under Harrison’s leadership the Fed 
continued with the program. In late spring, however, the British 
threatened to emulate the French. 

As early as March, the Bank of England had indicated that it did 
not want to let sterling appreciate in response to an expansionary 
program in the United States. At that time, however, the Bank of 
England was pursuing a modest “cheap money” policy of its own 
(with the enthusiastic support of the British Treasury, which urged 
the Bank of England to proceed even more vigorously.)— With 
sterling declining about as much as the dollar, there was no necessary 
conflict between the policies of the two central banks for several 
months. But while little overt conflict existed, concern on both sides 
led the two central banks and the Morgan bank to begin a round of 

As they negotiated, influential New York bankers, including 
Morgan partners who supported monetary expansion, complained 
about their lost foreign deposits: 

loans and deposits of the New York banks have fallen almost perpendicularly. . . . The 
loss of French and other foreign deposits, particularly since sterling went off gold, has 
fallen principally upon New York. Not only actual withdrawals of balances from 
America to abroad, but transfers of balances from banks to the Federal Reserve Bank 
have taken place. This loss of deposits has forced the New York banks to realize on 

I question whether the Federal Reserve Banks’ liberal purchases of bills and 
governments have even so much as kept step with the member banks’ losses in 
deposits and stillhaltungs [sic]. Such purchases cannot begin to have an affirmative 
effect on the general price level until they have exceeded the amount of the frozen 

credits and withdrawn deposits.— 

In late spring the Bank of England (though not the British 
Treasury) became concerned that sterling would drop too far. By 
May 26, the New York Fed was receiving cables that the Bank of 
England was selling dollars.— Pressure on the dollar mounted. 
Whereas French deposits in New York banks had been falling for a 
number of months, British funds plunged between May and August 
by over a third. Withdrawals of the remaining French deposits also 

The continued loss of gold and deposits put many New York 
banks in an increasingly uncomfortable position. As the difficulties 
associated with the pursuit of an independent monetary policy in a 
context of international capital mobility and a managed exchange 
rate were expressed in their balance sheets and income statements, 
the banks were faced with a dilemma. If interest rates rose, they 
would encounter losses on their bond portfolios that might lead to 
bank runs and insolvency. If interest rates fell, foreigners would 
withdraw deposits, forcing the banks to liquidate bonds and 
therefore realize losses on their bond portfolios due to the inelasticity 
of demand for bonds at the time of the forced sale. 

Not surprisingly, the New York financial community began 
sending mixed signals. Many complained that the reflation program 
had “demoralized money and exchange markets.”— 

Adding to the turmoil was the climax of the long-running battle 
over the national budget in early June. Harrison believed that the 
gold outflow would slow down once France removed its gold. But 
that did not prevent him from joining with leading businessmen in 
using the preservation of the gold standard as an argument in an 
ultimately successful fight for a sales tax and a balanced budget and 
against the reflation bills being debated in Congress. - 

For these reasons—the loan liquidation effect, the problems of gold 
distribution with the Federal Reserve System, and the problem of 
withdrawal of foreign balances—opposition to “inflation” intensified 
within the Fed and among bankers in the early summer. At various 
meetings complaints were voiced above the slowness with which 
monetary policy seemed to be working. Extensive discussion about 
the need to find borrowers and to coordinate investments and loan 
applications took place. Private bankers, Fed officials, and prominent 
industrialists laid plans for officially sponsored “banking and 
industrial committees.” Rather clear evidence that the proponents of 
monetary expansion were losing strength, these committees were 
shortly announced with a great flurry of public attention. - 

In June, just as optimistic Fed staffers and some private experts 
were announcing that the worst of the gold crisis had passed, the 
Bank of England asked the Fed to earmark more gold. Discussions 
between the Bank of England and the Fed continued into July; there 
are indications that these concerned sterling/dollar exchange rates. In 
any event, various Fed minutes and official documents refer quite 
explicitly to the anxiety felt in the New York district about the loss of 

foreign deposits (which now totaled almost half a billion dollars, 
since the first of the year—half the size of the reflation program for 
the system as a whole).— 

At the June 16 meeting of the executive committee of the open 
market policy conference, even Harrison declined to press for 
increases in the open market program. Something had changed. He 
suggested the Fed aim to “. . . maintain the excess reserves of member 
banks at a figure somewhere between $250,000,000 and 
$300,000,000 until there was some expansion of credit which would 
make it desirable to reconsider the program.”— Harrison’s decision 
to place the target in these terms probably reflects the increasing 
difficulty in getting more expansionary policies passed as much as a 
desire to use excess reserves as a target. It probably does not reflect 
confusion over the role of excess reserves, as Wicker maintained. 
Support for this view is found in the same minutes where “it was 
pointed out that a number of the [Federal Reserve] banks were 
limited by relatively low reserve percentages from taking their full 
quota of participation in System purchases.” 

At the beginning of July, the coup de grace to the program came 
from Chicago (which was then recovering from a staggering wave of 
bank failures and where bank margins were being desperately 
squeezed). As McDougal bluntly wrote Harrison in a letter: “We are 
of the opinion that no additional purchases should be made by the 
system. . . . While purchases by the system for the purpose of 
offsetting gold exports were probably justified, we believe that the 
additional purchases made were much too large and have resulted in 
creating abnormally low rates for short-term government 

• • n 

securities. — 

By the end of the month, open market operations were virtually 
stopped. At the July 14 meeting of the open market policy 
conference, “The Governors of a number of banks pointed out that 
with their reserve percentages not far from 50 percent their directors 
were reluctant to participate much further in open market purchases, 
particularly unless the operations were a united system undertaking.” 
Expressing hope that the banking and industrial committees would 
secure better results, the Fed and the bankers effectively abandoned 
the experiment as well as another privately financed bond pool 
announced in June.— 


Our evidence thus far has been mainly archival, and statistical tests 
would provide further confirmation. An ideal test of our underlying 
hypothesis, that the Federal Reserve policy in the Great Contraction 
responded primarily to the needs of the larger banks, would relate 
Fed behavior to the profits of large banks, controlling for the 
influences of other relevant variables in the economy. This test, 
however, is very difficult to perform because of the existing bank 
profit data. Most published sources report only semiannual figures 
for all banks by Federal Reserve district.— Several different kinds of 
statistical problems, requiring a variety of more or less plausible 
assumptions for their solution, must also be faced.— Within these 
limits, however, it is possible to estimate the determinants of the 
Federal Reserve Board’s monetary policy to see whether statistical 
evidence supports our explanation of the 1932 open market 

Consider first the dependent variable. Most of our sources suggest 
that the policy variables usually manipulated by the Federal Reserve 
were the amount of securities bought plus the amount of bills bought 
in its open market operations. (The open market committee made 
decisions about security purchases while the New York Federal 
Reserve had more control over the amount of bills bought, which it 
could affect by altering the rate offered on bills.) The larger the 
amount of securities and bills bought (OMO), the more expansionary 
is the monetary policy. 

Our analysis implies that several sets of independent variables are 
relevant. One involves various domestic influences on bank profits, 
and another reflects international constraints. A third group relates 
Federal Reserve reactions to pressure from industry, while a final set 
tests miscellaneous variables related to the structure of financial 
markets as well as other factors suggested in the literature. 

The first “domestic” variables include, for example, real wages. 
The Fed wanted to reduce real wages, hoping that lower wages 
would help restore bond prices by reestablishing industrial 
profitability and lowering inflationary expectations. Thus, when real 
wages increased, the Fed should have reacted by tightening the 
money supply, giving an expected negative sign on the real wage 
variable, RWACE. 

When bond prices fall, our hypothesis is that monetary policy 
would become more expansionary. Triple-A corporate bond prices 

( CORP ) are measured in absolute terms. Another variable to measure 
direct responses to bond prices is the difference between the long¬ 
term and short-term interest rates ( DIFF ). A widening difference 
might be a sign that the riskiness of long-term bonds was increasing, 
which would lead the Federal Reserve to attempt to expand the 
money supply to reduce the spread. 

Archival evidence suggests that alterations in the portfolios of non- 
New York large banks from loans and long-term assets to short-term 
assets led these banks in 1932 to pressure the Federal Reserve to 
tighten monetary policy in order to raise their profit margins. To 
measure the loan liquidation effect on non-New York banks, we 
have constructed a measure, RATM, which is the ratio of loans and 
long-term assets to total assets of non-New York large banks. As 
RATM falls these banks should have put pressure on the Fed to 
tighten monetary policy, implying a positive influence of RATM on 

International variables include free gold, foreign deposits, and 
currency sent abroad. Archival evidence indicates that the Federal 
Reserve was constrained by the availability of free gold, Friedman 
and Schwartz’s claims to the contrary. Free gold captures both the 
international and the domestic constraints imposed by the gold 
standard. The Federal Reserve was forced to maintain gold and 
collateral as backing for notes; even after Glass-Steagall, it still had to 
keep gold for cover. When the United States lost gold internationally 
the Fed was less willing to expand. If free gold was a constraint, then 
when more free gold became available, the Federal Reserve could 
more freely engage in open market operations. We have constructed a 
measure of free gold ( FGOLD ) which includes the freeing up of gold 
with the Glass-Steagall Act of 1932. We expect a positive coefficient 
on the FGOLD variable. 

As U.S. banks lost foreign deposits, the Federal Reserve became 
concerned about the effects on bank liquidity and profits. This 
suggests that as foreign deposits fell, monetary policy would become 
tighter, in order to protect the deposits. Our proxy for “deposits” is 
foreign deposits held at the New York Federal Reserve Bank. As an 
earlier quotation from Russell Leffingwell indicates, deposits were 
being taken out of the New York commercial banks and placed in the 
New York Federal Reserve. This loss of deposits to the New York 
banks would not be picked up in our data. With this caveat, we 
would expect a positive coefficient on the foreign deposit variable 


Our archival research also indicates that in crises the Federal 
Reserve was concerned that U.S. currency hoarded by American and 
foreign holders could be liquidated for gold or foreign assets. Data 
collected by the Fed on currency sent to and from abroad by New 
York banks can be used to estimate such occurrences. In crises 
currency tended to be sent to New York banks from abroad, 
apparently reflecting a previous hoarding of U.S. currency that was 
sent abroad and sold for foreign assets and gold; the currency then 
returned to New York banks for redemption.— We expect the 
Federal Reserve to tighten monetary policy when the flow of currency 
from abroad to New York ( CURAB ) is positive, indicating a threat 
to U.S. gold reserves. 

By January 1932 bankers and the Fed could not entirely ignore the 
effects of monetary policy on industry, if for no other reason than 
that industrial production affected loan demand and the profits of the 
banks. Thus, one might expect the Federal Reserve to conduct 
countercyclical monetary policy as suggested by Carl Snyder and 
other staff members of the New York Fed. This leads us to test for a 
third major type of independent variable, one that could be called 
“industrial,” based on the industrial production index (IP). Open 
market purchases by the Fed might be expected to increase when IP 

Finally, Wicker, Brunner and Meltzer, and others have 
hypothesized that the Federal Reserve mistakenly used excess reserves 
as an indicator of monetary policy. When excess reserves were high, 
they argue, the Federal Reserve stopped expanding the money supply. 
This hypothesis would suggest that when excess reserves ( EXRE) 
went up, the Federal Reserve contracted the money supply, implying 
a negative relationship between EXRE and OMO. 

It might also be expected that, given the function of the Federal 
Reserve as a potential lender of last resort, the Fed might try to 
reduce bank failures. In this case, when there was an increase in 
failures (FAIL), monetary policy would become more expansionary. 

The equations we estimate are in double log form and the 
coefficients are the elasticities. All independent variables have been 
lagged by one period, and the results have been corrected for first- 
order serial correlation by using the Corchrane-Orcutt technique. The 
time period, from February 1930 to February 1933, was chosen to 
avoid the effects of the stock market crash in October 1929 and the 

banking panic of March 1933. All data are monthly. Definitions and 
sources are given in appendix 3.1 . 

Three of the coefficients in table 3.3 . industrial production, real 
wages, and free gold, are uniformly of the hypothesized sign and are 
significant at least at the 10 percent level and usually at the 1 percent 
level for a one-tailed test. During this period, the Fed tightened 
money when real wages or industrial production rose and when free 
gold fell. 

TABLE 3.3. Explaining Open Market Operations Monthly Data, February 1930 to February 
1933 (Dependent variable: securities plus bills bought) 













































































R 2 






Durbin-Watson statistic 










Source: See text. 

Note: t-statistics in parentheses. 

The loan liquidation variable ( RATM) is also of the hypothesized 
sign and is usually significant at least at the 10 percent level. This 
variable indicates that, other things being equal, as the loan- 

liquidation effect took hold (that is, as banks become more 
dependent on bills and security investments for their earnings), Fed 
policy became less expansionary, as our hypothesis implies. 

The bond risk variable ( DIFF ) also has the correct sign and is 
almost significant at the 10 percent level. But an alternative measure 
of the capital loss variable ( CORP ) has the wrong sign, and the 
coefficient is significant, although RATM, which is significant, may 
already reflect this capital-loss effect. The explanation of the 
coefficient on CORP is not clear and calls for further analysis. 

Among the international variables, the free gold variable ( FGOLD) 
has the predicted sign, as does “currency sent to and from banks 
abroad” ( CURAB ). Alternative foreign deposit variables, however, 
do not show up as well, perhaps because the data for foreign 
balances include balances held at the New York Fed. Results for 
deposits of failed bank (FAIL) indicate that the Federal Reserve was 
unconcerned about all banks.— 

Finally, excess reserves are indeed significant determinants of Fed 
policy during this period, but the coefficient is the opposite sign of 
that implied by the Brunner-Meltzer hypothesis. The Federal Reserve 
seemed to have reinforced excess reserves rather than worked against 
them; other variables remain unchanged. 

In summary, the results on the main domestic and international 
variables appear consistent with our major hypotheses, and the 
Brunner-Meltzer hypotheses are not supported. 


We have argued that conflicts of interest within the Federal Reserve 
System, and between it and the rest of the economy, help account for 
the Fed’s notorious failure to arrest the Great Contraction. Although 
our findings are tentative, we believe we have established a prima 
facie case that previous accounts of the Fed in this period are 
mistaken in several important respects. There were, for example, real 
international constraints on the Fed throughout the period 1929 to 
1932. Free gold was a problem until early 1932; thereafter, the loss 
of foreign deposits in private banks and the need to maintain the 40 
percent gold cover on Federal Reserve notes constrained the Fed. As a 
consequence of what we termed the loan liquidation effect, bitter 
conflicts arose within the Fed concerning yields of short-term 

government securities. 

By ignoring or abbreviating consideration of these factors, the 
existing literature has failed to come to grips with important 
historical questions and major theoretical points. Viewed in terms of 
our analysis, most of the mystery evaporates about two controversial 
issues in the later financial history of the Depression: the final 
disastrous run on the banks that led to the “bank holiday” of early 
1933 and all the subsequent worries within the system about 
inflation after 1935. Both of these are almost unintelligible in terms 
of the standard historiography. That the Federal Reserve System 
largely sat on its hands as the entire American financial structure 
collapsed seems unbelievable. That anyone could fear “inflation” in 
1935 to 1936 is not any more comprehensible. 

In our view, of course, neither of these issues poses a problem. At 
the January 4, 1933, meeting, before the final banking crisis and after 
Governor Meyer observed that “at no time since the war has the 
relation between the open market policy of the Federal Reserve 
System and the general economic situation been so important,” 
Governor George Norris of Philadelphia aptly summarized our thesis. 
“Further increases in excess reserves,” he noted, “would adversely 
affect bank earnings, and incur the risk of disturbance which might 
arise from eliminating interest on deposits.”— 

As the Depression deepened, the loan liquidation effect proceeded 
apace. By the mid-thirties, the position of all the Federal Reserve 
banks had come to resemble the position of Chicago in 1932. With 
their earnings tied directly to rates on the government securities they 
now widely held, most bankers, not surprisingly, favored the 
increases in reserve requirements that the Fed eventually awarded 
them. They were less concerned with the effects these might have on 
the rest of the economy. - 

Previous research has failed to reckon with the possibility of what 
might be termed a “supply-side liquidity trap.” As Keynes alone 
seems to have recognized (see the headnote), the capitalist 
organization of finance implies that interest rates may fail to drop 
low enough to revive an economy because bank earnings might not 
permit it in an acute depression. Moreover, contemporary students of 
money and banking have not reconciled a fundamental problem of 
the current system of bank regulation: that the Federal Reserve 
System is charged with performing two often incompatible tasks— 
that of advancing the interests of a specific industry while 

simultaneously overseeing the protection of other businesses and the 
public at large. 


A Note on Sources 

Specification of all the variables used in this paper is contained in 
appendix 1 of our “Monetary Policy.” Most data came from the 
Board of Governors of the Federal Reserve System, Banking and 
Monetary Statistics (Washington, D.C., 1943), hereafter BMS. Other 
variables, not drawn from that source or indirectly derived from 
figures in it, follow. CURAB, shipments of currency abroad from 
New York banks in thousands of dollars: Federal Reserve Bulletin, 
January 1932, p. 9, and February 1933, p. 103. Figures do not reflect 
outflows of currency from non-New York banks. FAIL, deposits of 
suspended banks (in $ thousands): Federal Reserve Bulletin, 
September 1937, p. 909. Figures are monthly, and cover all banks. 
RWAGE, M. Ada Beney, Wages, Hours, and Employment in the 
United States, 1914-36, National Industrial Conference Board Study 
No. 229. (New York, 1936), p. 50. FB, monthly data for total short¬ 
term foreign liabilities reported by banks in the United States (in $ 
millions): BMS, pp. 574-80, and subtract out French foreign balances 
after January 1932, since the Fed had reached an agreement with the 
French Central Bank concerning removal of the balances, and 
monetary authorities proceeded in the expectation they would be 
removed. FGOLD, free gold: February 1930 to January 1932: BMS 
as described in Federal Reserve Bulletin, March 1932. See also H. 
Villard, “The Federal Reserve System’s Monetary Policy in 1931 and 
1932,” Journal of Political Economy, 45 (December 1937), 734. 
February 1932 to February 1933, FGOLD is represented by bank 
excess reserves, to take account of Glass-Steagall. The data are from 
Annual Report of the Federal Reserve Board, 1933 (Washington, 
D.C.), p. 94, Table 9. IP, manufacturing and mining production, 
seasonally adjusted: Board of Governors of the Federal Reserve 
System (Washington, D.C., 1960), pp. 150-151. OMO, bills 
purchased plus government securities purchased, from BMS. RATM, 
the ratio of loans and long-term bonds to total assets for non-New 
York reserve city banks and Chicago central reserve city banks, has 
been converted to monthly data by linear extrapolation from 

quarterly data in BMS. 

Earlier versions of this chapter were read at the Annual Conferences 
of the Southern Economics Association and the American Historical 
Association. The authors are especially grateful to Richard Sylla and 
Peter Temin for extensive comments on several drafts. For other 
assistance, they should also like to thank Carl Backlund, Samuel 
Bowles, James Crotty, Richard Duboff, Michael Edelstein, Barry 
Eichengreen, John Garrett, Brian Gendreau, Stephen Goldfeld, Ellis 
Hawley, Edward Herman, Robert Johnson, Charles Kindleberger, 
Stanley Lebergott, Richard Nicodemus, Leonard Rapping, Juliet 
Schor, Barrie Wigmore, David Weiman, and the editors and referees 
of the Journal of Economic History. This essay was in every sense 
joint work, and the alphabet was therefore allowed to determine the 
order of the authors’ names. The essay has also benefited liberally 
from the discussion of the American political economy of the late 
1920s and early 1930s in Thomas Ferguson, Critical Realignment: 
The Fall of the House of Morgan and the Origins of the New Deal 
(New York, Oxford University Press, forthcoming). For further 
discussion of the issues in this paper see Epstein and Ferguson, 
“Answers to Stock Questions: Fed Targets, Stock Prices, and the 
Gold Standard in the Great Depression,” Journal of Economic 
History, 51, 1 (March 1991), 190-200. 


Industrial Structure and Party Competition in the 
New Deal: A Quantitative Assessment 

[At] a mass meeting in the heart of the Wall Street District, about 200 business leaders, 
most of whom described themselves as Republicans, enthusiastically endorsed 
yesterday the foreign trade policy of the Roosevelt Administration and pledged 
themselves to work for the President’s reelection . . . the Meeting unanimously 
adopted a resolution praising the reciprocal trade policy . . . Governor Landon’s 
attitude on the reciprocal tariff issue was criticized by every speaker. They contended 
that if Landon were elected and Secretary Hull’s treaties were revoked, there would be 
a revolution among conservative businessmen. 

The New York Times , October 29, 1936 


THE NEW DEAL’S curiously elusive political formula—at once 
daringly radical and venerably conservative—has perplexed analysts 
for almost two generations. “From ‘Normalcy’ to New Deal” 
(originally published in 1984; chapter 2 of this volume) sought a 
fresh approach to the puzzle. Relying extensively on primary sources, 
the essay traced how an entirely new kind of political coalition—one 
dominated by capital-intensive, multinationally oriented businesses— 
rose to power during the stormy days of the Second New Deal of 

Because they were predominantly capital-intensive, these 
enterprises were not seriously jeopardized by the epochal welfare 
measures that they and Franklin D. Roosevelt’s administration 
collaborated in preparing. And because they were internationally 
oriented, these enterprises were the primary beneficiaries of the 
administration’s historic turn to free trade after 1934. 

The essay also outlined how the 1936 election figured in this 
triumph of multinational liberalism. As the administration prepared 
to sign the Tripartite Money Agreement and raise bank reserve 
requirements (as many financiers were demanding), Republican 
nominee Alf Landon came under fierce pressure from his party’s base 
of protectionist, mostly labor-intensive (the chemical industry was an 
exception) manufacturers to repudiate Cordell Hull’s trade treaties. 
For a while the Kansas governor resisted. Eventually, however, he 


Wall Street financiers publicly rallied to attack Landon while 
enough multinational luminaries to fill a future Democratic 
president’s cabinet left the GOP campaign, including cotton broker 
Will Clayton (who also resigned from the American Liberty League), 
banker James Warburg, and superlawyer (and former Treasury 
Undersecretarty) Dean Acheson. Meanwhile, a phalanx of famous 
non-Morgan investment bankers (including more future Democratic 
cabinet appointees, e.g., James Forrestal and Averell Harriman) 
joined (imported) sugar refiner Ellsworth Bunker and many oil 
executives in raising funds for FDR’s campaign. The outgoing 
president of the American Bankers Association and the head of 
American Locomotive (a large would-be exporter) endorsed the 
president’s reelection. The Rockefeller-controlled Chase National 
Bank and Manufacturers Trust each loaned the Democratic National 
Committee $100,000 (an amount equivalent to slightly less than one 
million 1991 dollars), while the Bank of America lobbied on behalf 
of the president. 

In the campaign’s final days, Landon began to attack the Social 
Security Act. As fainter hearts from the previous year’s special 
advisory committee on social security recoiled from embroilment in 
electoral politics, the presidents of the Standard Oil Co. of New 
Jersey and General Electric (whose own chair stated flatly to 
intimates that he favored the president’s reelection) publicly rebutted 
Landon’s criticisms. The New York Times endorsed FDR, while 
tobacco companies and retailers distributed literature defending 
social security.f 

Several historians have plainly stated their own prizewinning work 
on American foreign policy confirms “From ‘Normalcy’ to New 
Deal’”s findings (Hogan 1987, pp. 11-12, 1986, p. 365; Cumings, 
1990, pp. 18, 90-91). Economists of markedly different viewpoints 
have also published confirming evidence that, in at least one case, 
they initially disbelieved (Magee, Brock, and Young, 1989, pp. 179- 
201; Borchardt, 1991, p. 15).- It is also fair to say that critics of an 
essay ( chapter 3 of this volume) I coauthored on the Federal Reserve 
in the early 1930s, whose arguments are integral to my main work on 
the New Deal, fared poorly in a recent exchange (Epstein and 
Ferguson 1984; Coelho and Santoni, 1991; Epstein and Ferguson, 

Webber (1991), however, claims to refute my account of the New 

Deal. He also asserts that his paper invalidates my broader 
investment theory of party competition ( Chapter 1 [originally 
published in 1983] of this volume; Ferguson 1986). 

On first reading, his analysis appears highly plausible. The 
apparently stark evidence presented, e.g., table 9, “Campaign Finance 
Contributions of $100 or More of Officers and Directors in Key 
Firms Named by Ferguson to Illustrate His ‘Investment Theory of 
Politics,’” appears precise and, accordingly, convincing. 

His evidence, however, is flawed. While claiming to test my 
theories, Webber ignores my discussions of how quantitative data can 
be used to test my views (see my essay, originally published in 1989, 
in chapter 5 of this volume; along with chapter 1 and Ferguson, 
1991; Ferguson and Rogers, 1986; appendix ) and puts forward a 
statistical design of his own that is desperately vulnerable. His 
sample, for example, is defective: it includes many people it should 
not and excludes many others who should be reckoned in, including 
many prominent Texas oilmen. His effort to test my views by 
reporting percentages of top officials and directors contributing is 
wrong in principle, since it excludes large cash payments made to the 
Democrats during the 1936 campaign by such firms as Standard Oil 
of New Jersey and General Electric, as well as the loans that Chase 
and other banks bestowed on the Democrats. The method also is 
insensitive to cases in which a single executive dominated the political 
activities of firms. And the campaign finance data he relies upon are 
also far less complete than he implies, while his statistical methods 
are hopelessly defective. Indeed, because he only occasionally 
compares percentages across industries, he fails to notice the clues in 
his own study that support my argument about the distinctive 
political behavior of capital-intensive industries during the New Deal. 

However, to show that Webber is wrong about the New Deal does 
not prove that I am right. Thus, after critically reviewing Webber’s 
findings, this essay will present results of direct statistical tests of the 
central claims of “From ‘Normalcy’ to New Deal.” Based not only on 
the parts of Overacker’s data files that Webber relied on—those 
concerning individual contributions—but on the rest of her files as 
well, which record direct corporate contributions, and based on my 
own work in many other archives, the tests strongly support “From 
‘Normalcy’ to New Deal’”s analysis. They also demonstrate that the 
pivotal notion of my investment theory of political parties—that 
competition within the business community is central to the 

American electoral process—is a straightforward proposition to test 


In regard to this latter, broader, point, one initial clarification is in 
order. Though Webber claims that his results embarrass my 
investment theory of political parties, he nowhere addresses that 
theory directly. Indeed, he virtually ignores the essay ( chapter 1 ) in 
which I advanced the investment account of parties—an essay that 
was written after, although published before, “From ‘Normalcy’ to 
New Deal.”- His presentation creates the impression that my analysis 
of the New Deal is largely coextensive with this investment theory of 
parties, and that by attacking the one he can strike fatally at the 

But this is not possible even in principle. The investment theory 
essay presents a general case: pressures of time, limited information, 
financial constraints, and transaction costs (including many imposed 
by political systems, such as direct repression) are more burdensome 
to ordinary voters than classical democratic theorists allow. As a 
consequence, political parties in countries such as the United States 

are not what . . . most American election analyses . . . treat them as, viz, . . . the 
political analogues of “entrepreneurs in a profit-seeking economy” who “act to 
maximize votes.” . . . Instead, the fundamental market for political parties usually is 
not voters . . . most of these possess desperately limited resources and—especially in 
the United States—exiguous information and interest in politics. The real market for 
political parties is defined by major investors, who generally have good and clear 
reasons for investing to control the state. . . . Blocs of major investors define the core 
of political parties and are responsible for most of the signals the party sends to the 
electorate (chapter 1, p. 22 ). 

In such investor-driven systems, the meaning of political 
competition is very different from its analogue in classical democratic 

political parties dominated by large investors try to assemble the votes they need by 
making very limited appeals to particular segments of the potential electorate. If it 
pays some other bloc of major investors to advertise and mobilize, these appeals can 
be vigorously contested, but ... on all issues affecting the vital interests that major 
investors have in common, no party competition will take place. Instead, all that will 
occur will be a proliferation of marginal appeals to voters—and if all major investors 
happen to share an interest in ignoring issues vital to the electorate, such as social 
welfare, hours of work, or collective bargaining, so much the worse for the electorate. 

Unless significant portions of it are prepared to try to become major investors in their 
own right, through a substantial expenditure of time and (limited) income, there is 
nothing any group of voters can do to offset this collective investor dominance 
(chapter 1, p. 28 ). 

In terms of the spatial models of voter behavior now so fashionable 
in the social sciences, this principle of noncompetition has a striking 
implication: the general failure of control by the “median voter” (the 
voter whose strategic position exactly in the middle of a distribution 
of voters guarantees a candidate one more vote than he or she needs 
to defeat all comers). For example, consider a world in which labor- 
intensive textile producers (3 percent of the voting population) 
command virtually all pecuniary resources beyond those necessary 
for ordinary wage earners to live (a world, that is, characterized by 
the “classical savings function” popularized by Kalecki, Kaldor, and 
Robinson). Suppose, further, that an election is being staged in which 
everyone recognizes that the only issue is passage of a law that is 
likely to lead to 100 percent unionization of the work force. All wage 
earners agree that the law is desirable. All textile magnates 
vehemently disagree. What stance do the political parties adopt? If 
money matters importantly to the campaign, no party can afford to 
take up the median voter’s position in figure 4.1 —a position at the 
right-hand peak (marked “97%”) that indicates the views of the vast 
majority—even though no one is being fooled about anything. 
Because all parties depend on textiles for funding, they must comply 
with the industry’s demand for a union-free environment, or else they 
cannot afford to compete at all. Conversely, if a second party 
dependent on capital-intensive industries that do not object to, say, a 
scheme for 20 percent unionization can raise enough funds to offer 
another deal—a New Deal, that is—then the populace may get a 
chance to vote for the latter; still, the median position is never 

% Voters 

Desired % Union 

FIGURE 4.1. An Overwhelming, but Unsuccessful Majority for Unionization—An Idealized 

Webber, accordingly, can scarcely claim to invalidate my 
investment theory of parties by attacking my account of the partisan 
breakdown of American business during the New Deal. That would 
simply beg the question of what underlay a Democratic coalition 
that, after all, admitted to spending more than $5 million during the 
depths of the greatest depression in world history in order to retain 
the presidency (a sum that attracted less attention than it should 
have, since the Republicans spent even more). This question cannot 
be escaped by pointing, as Webber does toward the end of his essay, 
at the fact that ordinary people voted for Roosevelt and the 
Democrats. If he wants to refute the investment theory, Webber 
needs to show not that people voted for the Democrats, but that the 
party did not need money to campaign to get those votes. (Or, 
perhaps, that organized labor, which contributed about $770,000 to 
FDR’s campaign, or some other segment of the severely cash- 
strapped general electorate, could somehow have increased its 
contributions by 700 percent had business funds not been 
forthcoming [Overacker, 1946, p. 50]). 

But, of course, even Roosevelt had to raise large sums to be 
reelected. And this brings us to the data that Webber presents to 
refute “From ‘Normalcy’ to New Deal.” 


His point of departure appears so naively reasonable that one might 
hesitate to challenge it: “By framing the argument in terms of large 
firms and industrial segments, Ferguson makes it possible to test his 
claims by examining the campaign contributions of the top officers 
and directors of such firms” (Webber, 1991, p. 477). 

To test my theory, Webber should not ignore the various papers I 
have written on how to do so, particularly those that set out the 
methods I believe are appropriate for analyzing campaign finance 

It is best to begin with the problem’s most general aspect. Webber 
claims that “. . . Ferguson places great emphasis on the importance of 
campaign finance contributions in his analysis of the New Deal” 
(1991, 474). But this is so only in a far more equivocal form than his 
paper suggests. I certainly believe that social scientists and historians 
have neglected campaign finance. I am also convinced that intelligent 
appraisals of the meager data that survive yield important insights 
into how the American (and every other) political process really 
works. Indeed, this is precisely what I believe I have demonstrated in 
my series of quantitative papers on recent elections ( chapters 5 and 6; 
Ferguson, 1991) and my coauthored book (Ferguson and Rogers, 

But reliance on the “Golden Rule” as an initial working hypothesis 
has never tempted me to suppose that the principal political use of 
money is for campaign contributions. The truly general notion 
employed explicitly in the “Investment Theory” and “From 
‘Normalcy’ to New Deal” chapters concerns “support” for policies 
or politicians. “Support,” however, includes much more than simply 
funnelling cash to politicians at election time: 

The beginning of real wisdom in these matters . . . occurs when one reflects that direct 
cash contributions are probably not the most important way in which truly top 
business figures (“major investors”) act politically. Both during elections and between 
election campaigns, their more broadly defined “organizational” intervention is 
probably more critical. . . such elite figures function powerfully as sources of contacts, 
as fundraisers (rather than mere contributors), and, especially, as sources of 
legitimation for candidates and positions. In particular . . . the interaction of high 

business figures and the press has frequently been pivotal for American politics . . . 
[this is] an in-kind service whose value dwarfs most cash contributions (chapter 1, p. 

Webber criticizes “From ‘Normalcy’ to New Deal” for resting its 
case in part on “diaries, letters, and newspapers of the period.” Yet 
these are precisely the kind of evidence that the “Investment Theory” 
essay identified as particularly appropriate for assessing facts (and 
thus theories) about business support. 

A recent essay of mine also issues two other caveats to analyses of 
politics and money that take campaign finance as their principal 
focus. One is the fact that lobbying expenditures vastly exceed total 
spending on campaign finance. The other is the less manifest reality 
that “the most important modern use of money in politics” is the 
“subsidization of information through think tanks and policy 
research institutions, and the closely related emergence of private 
foundations as a major source of support for research on public 
policy” (Ferguson, 1992).- “From ‘Normalcy’ to New Deal” 
discussed both foundations and research organizations; any serious 
effort to test its account must do so as well. 

If, in contrast to Webber, one observes these qualifications, an 
inquiry into campaign finance is perfectly sensible. But the 
methodology needs to be very carefully designed. 

As my “Investment Theory” essay cautioned, the ways in which 
politically relevant money is hidden are almost limitless: 

Large numbers of pecuniary contributions were understated or never recorded at all. 
Cash paid in the form of excessive consultant, lawyer, and other third-party fees is 
rarely noticed and in-kind contributions almost never listed. “Loans” which are never 
repaid or are granted on preferential terms [which, from the standpoint of economic 
theory, include virtually all political loans, since most would never measure up to an 
honest bank examiner’s standards] rarely attract notice. Neither do “gifts” to 
“friends.” Not surprisingly, almost every seriously pursued investigation of campaign 
contributions, from the Hearst-inspired attacks on Theodore Roosevelt and E. H. 
Harriman to the recent inquiries into corporate bribery conducted under the auspices 
of the Securities and Exchange Commission, has unearthed unreported contributions 
of astronomical magnitude. ... A good rule of thumb, accordingly, is to treat 
published campaign contributions ... as the tip of an iceberg, and be wary of any 
analysis that relies only on them (chapter 1, pp. 40-41 ). 

These elementary facts guarantee that Webber’s strategy of 
displaying percentages of top officers and directors reported by one 
source as having personally contributed at least $100 to either party 
is likely to go astray. Consider, first of all, a pair of procedural 

decisions he made to construct his data set: 

All company and institutional contributions, such as those made by various labor 
unions, were excluded, so that only individual contributions were included in the final 
compilation, (p. 479) . . . loans, and illegal or returned contributions were not 
included (Webber, 1991, p. 480). 

These decisions have major implications. The first excludes a host 
of large donations from giant firms that are central to “From 
‘Normalcy’ to New Deal”’s claims. Through precisely the sort of 
stratagems that the “Investment Theory” essay warned about, these 
firms as firms directly gave the Democrats amounts far larger than 
the $100 minimum that qualifies individuals for inclusion in 
Webber’s tables. Among these were all of the capital¬ 
intensive/internationalist firms his table 9 singles out to refute my 
views—General Electric ($2,500), Standard Oil of New Jersey 
($2,500), International Harvester ($2,500), American Tobacco 
($2,500)—as well as many more businesses of obvious relevance to 
testing my views, such as Phillips Petroleum ($2,500), Signal Oil 
($3,500), Ohio Oil ($1,000), R. J. Reynolds (more than $3,000), 
Liggett & Meyers ($2,500), Lorillard Tobacco ($500), Eastman 
Kodak ($625), Boeing ($2,500), Grumman ($2,500), Ford Motor 
($4,000), Crown Zellerbach ($1,500), IBM ($2,500), United Fruit 
($5,000), and American Radiator and Standard, the multinational 
giant (at least $10,000). Yet none of these contributions—which had, 
incidentally, virtually no counterparts on the Republican side—figure 
in his tables, since they were not contributed by individuals.- 

In addition, Webber’s procedure makes the Chase National Bank 
and its legendary owners disappear, as well as Manufacturers Trust, 
which shows up in his tables as a bank that inclined toward the 
Republicans due to a handful of contributions worth, all told, a tiny 
fraction of the bank’s aid to the Democrats. This is a consequence of 
his excluding loans—even those as large as $100,000, and on which, 
some five months after the election, the campaign still owed each 
bank $60,000 (Overacker, 1937, p. 497). 

Further Difficulties 

Webber’s “individual percentage” strategy has another defect. Prior 
to the mid-seventies’ legislation that placed (still very elastic) limits 
on individual contributions to presidential candidates, firms had no 

particular incentive to spread out campaign contributions among 
several officers. Depending on circumstances, one person could easily 
superintend the political equivalent of the one-stop shop. Or, more 
commonly, a particularly well-placed person handled most of the 
serious political negotiations while handing out the lion’s share of the 
cash, even if other executives also contributed. 

James A. Moffett provides an instructive example. Judging from 
the entry in his table 6 for Standard Oil of California—which 
indicates no aid to the Democrats—Webber appears unacquainted 
with the case. But, if one wants to assess the relation of the oil 
industry to the New Deal, one dares not neglect him. 

Moffett served for years as a high official and director of Standard 
Oil of New Jersey. By 1932, the entire oil industry was in crisis. 
Moffett, in the meantime, had become a friend and very early 
supporter of Roosevelt for president. On the basis of an interview 
and many documents which I obtained from the widow of a close 
associate, “From ‘Normalcy’ to New Deal” related the story of how 
Moffett and an American contact of Sir Henri Deterding, the head of 
Shell Oil, teamed up to help push the United States off the gold 
standard and persuade FDR to send his famous message that wrecked 
the London Conference. But Moffett did not then disappear; for a 
while he served Roosevelt as an oil administrator. Later, after a 
major disagreement with Walter Teagle, who headed Jersey Standard 
(and whose celebrated fondness for hunting and fishing enabled him 
to periodically dispatch fresh fish or game to the White House), 
Moffett left Jersey Standard. But he did not thereby leave the 
“family”: Standard Oil of California immediately hired him as a 
senior vice president. Over the next few years, Moffett shuttled back 
and forth, sometimes working formally for FDR and sometimes 
formally for Socal. In 1935, he negotiated the fateful lease with the 
Saudis that led to the creation of Caltex, a joint subsidiary of Socal 
and Texaco (which he soon headed) and, a decade later, to the 
formation of the ultimate American multinational: Aramco. 

Neither the Lonergan Committee records nor the Overacker data 
contain any entries for contributions from Moffett during the 1936 
campaign. There is, nevertheless, absolutely no doubt that he was 
deeply involved in the campaign: still serving as a Socal vice 
president, he was showcased in public as a member of the executive 
advisory committee of the Democratic National Campaign 
Committee. The archives of the Roosevelt library also testify to his 

easy, indeed, almost casual, access to the White House. 

Similarly, Montana’s J. Bruce Kremer, for decades a member of the 
Democratic National Committee, was notorious for his close 
relations with the Anaconda Copper Co. that long dominated his 
state (Malone, 1975, pp. 243-245). Should he, a regular party 
contributor, who donated in 1936, be counted in any effort to assess 
Anaconda’s political contributions that year? (It begs the question to 
reply that his relation with the local power company was almost 
equally infamous. )- 

With omissions like these, the only “systematic” aspect of tables 
reporting the proportion of executives contributing $100 or more is 
that they may often be systematically wrong as a guide to what 
happened. Yet even the counts of the contributions cannot be 
accepted at face value. 

First, there is the problem that many of the wrong people are being 
counted. Webber tabulates the contributions from both directors and 
top executives of the firms in his sample. The tables group together 
contributions from both without distinguishing between them. 

Again, while this procedure appears eminently reasonable, it is 
open to grave objection. The role that directors play in the modern 
corporation has been the subject of vigorous debate. Some analysts 
view them as virtual pawns of the management. Others dispute this 
“managerial control” thesis, arguing that owners of large blocks of 
stock still wield decisive power. Also, it is sometimes suggested that 
banks, either because they hold large amounts of stock in trust, or 
simply because they provide vitally needed liquidity, exercise plenary 
power in most modern corporations (Kotz, 1978; Chandler, 1990; 
Burch, 1972). 

This discussion has important implications for campaign finance 
studies, but space limitations make it impossible to review the various 
arguments. Here I can only state that my own work in archives and 
experience as a consultant to very large firms convinces me that the 
bank control thesis is untenable. In economies like those of Britain 
and the United States (since at least World War I), with fairly deep 
financial markets and relatively open securities emporia, bank power 
is distinctly limited, although it surely varies over the business cycle. 

If one dismisses the bank control argument, then the exact view 
one takes about the managerial revolution—the case for which I 
consider overstated, especially for the 1930s, but also as identifying a 
real tendency even then—is less important, but with this 

qualification: it is essential to draw a clear distinction between 
“inside” directors (those who serve in the firm’s management), 
directors who represent large, presumably controlling, blocs of 
shares, and “outside” directors, whose interest—irrespective of pious 
legal injunctions about fiduciary duty—is basically aligned with their 
own firms. 

In assessing political contributions, those of the first two classes of 
directors can reasonably be aggregated with donations from a firm’s 
other top managers, but the third type should not be. Otherwise, one 
will in effect be sampling the rest of the economy instead of the firm 
in which one is interested. Bank boards, for example, frequently 
contain many outside directors from other large firms. These outside 
directors normally do not run the bank—indeed, Chase and some 
other banks threw large numbers of them off their boards during the 
New Deal. The practice of keeping them on the board was defended, 
then and now, in terms of attracting potential business customers, 
not in terms of recruiting potential controlling interests, and there is 
certainly no reason to assume that outside directors, in making 
political contributions, generally do not look principally to their 
primary interests. 

In my own quantitative work I have tried to weed out the outside 
directors (an arduous task for almost every period save the 1930s, 
when the famous Temporary National Economic Committee (TNEC) 
study provided unrivalled data about stockholders). Webber does not 
draw any distinctions. Accordingly, since no one has ever suggested 
that most big businessmen supported Roosevelt, his tables surely 
inflate the numbers of Republican sympathizers. 

Additional Data and Sample Problems 

Webber’s methodology also excludes a second class of actors that I 
called attention to in my own work on operationalizing the 
investment theory: the very wealthiest private investors. The logic in 
favor of their inclusion is as follows: the investment theory is 
concerned principally with “large investors” (in the sense [ chapter 1 ] 
of major economic actors, rather than the idiosyncratic meaning of 
someone who happens to invest heavily in one particular race). 
Webber takes this to mean the largest firms in each industry. This is, 
fundamentally, perfectly sensible. It is essentially equivalent to the 
first steps I take in constructing samples for my own quantitative 

studies. But one has to realize that lists of large firms (which, when 
they are based on Moody’s or, more recently, Fortune Magazine and 
similar sources, also typically exclude some very large privately held 
firms) are only part of the solution. A substantial number of 
individual investors exist whose vast resources are comparable to 
firms on at least the middle-to-bottom rungs of any rank ordering of 
large firms. Some way has to be found to take such individuals into 
account. For contemporary research, someone undertaking the task 
of estimating wealth holdings would probably adapt Forbes’s annual 
list of the richest Americans. There are no perfect sources for the 
thirties, but, as indicated below, it is possible to find ways to cope. 

If one does not, the consequences are likely to be serious. The oil 
industry is perhaps the most important of all modern American 
capital-intensive industries—and its behavior in the New Deal was a 
major focus of “From ‘Normalcy’ to New Deal.” Webber believes 
that he can refute my analysis by sampling various sizes of oil 
companies listed in Moody’s. But this notion is wrong. We have 
already discovered that his treatment of Standard Oil of New Jersey, 
Phillips, Socal, Ohio Oil, and other firms that donated directly to the 
Democrats is hopelessly misleading. But it is also deeply significant 
that many of the greatest fortunes in modern America—such as those 
amassed by Clint Murchison, Sid Richardson, H. L. Hunt, and others 
—began their exponential growth in the oil fields of East Texas. And 
many of this group were strong backers of the New Deal until well 
past 1936. Typically, these operators shuffled small, usually privately 
held, often even unincorporated, companies around like so many 
playing cards. Such concerns will not appear, except by accident, on 
any list of firms compiled from standard business sources. But if they 
are omitted, it is idle to generalize about oil and the Democrats. 

Omissions of this sort are one reason Webber’s discussion of the 
oil industry misses what “From ‘Normalcy’ to New Deal” brought 
into focus for the first time. But there are other problems with his 
discussion as well. 

My analysis of the oil industry’s relation to the New Deal, for 
example, drew heavily on primary sources, including the personal 
papers of a leading New Deal oilman. One cannot delve very deeply 
into such sources, however, before the inadequacies of existing 
campaign finance data become apparent. Yet, in sharp contrast to the 
methodological canon quoted earlier from my “Investment Theory” 
essay—“a good rule of thumb ... is to treat published campaign 

contributions ... as the tip of an iceberg, and be wary of any analysis 
that relies only on them”—Webber scarcely raises any questions 
about missing data. Not once does he consider whether one reason he 
disagrees with me is that I might have uncovered some facts not 
reflected in his limited data. 

But “letters, diaries, and newspapers of the period” almost always 
repay careful attention. It is easy to show that both the Lonergan 
Committee’s public report and the larger data set Overacker valiantly 
rescued (which together constitute Webber’s sole source) are seriously 
incomplete. Indeed, this is precisely why I did not undertake a 
statistical analysis of the data in the original committee report. 

The 1925 law Webber mentions in his brief discussion of his data 
was never seriously enforced—Sorauf suggests that not one person or 
corporation was ever prosecuted under it—and was clearly honored 
mostly in the breach, so that reported funds represented a mere 
fraction of the funds actually deployed in campaigns (Sorauf, 1988, 
pp. 28-33; Ferguson, 1992). Large amounts of money were raised 
locally, by county and precinct committees, by special local and state 
funds, and by any number of other imaginative vehicles, with 
exiguous or no records kept. 

County committees around New York, for example, raised 
prodigious amounts of funds quite independently of the national 
committees. These funds came essentially from New York business 
groups, including, notably, the House of Morgan, which could and 
often did make transfers to other states and regions, or to the 
national committee itself, without ever accounting for where the 
money came from (Ferguson, 1992). The Overacker records Webber 
relies upon contain many references to transfers from groups such as 
the Democratic State Committee of New York, the Nassau County 
(Long Island) Republican Finance Committee, etc., with no notation 
as to who gave how much. 

The Lonergan Committee’s own surveys of contributors did little 
to lift this veil of darkness. While it did attempt to gather data on the 
principal state party funds, the committee decided at the outset not to 
issue any subpoenas. (Not surprisingly, the committee’s final report 
complained that some state committees ignored its queries.) The 
committee also decided not to pursue county and precinct data at all, 
nor did it even try to identify “innumerable” “emergency committees 
and organizations” that “ostensibly function independently of the 
regular national party organizations” at both the national and state 

levels, whose cumulative impact on the campaign was acknowledged 
to be “tremendous in scope and financial import” (U.S. Congress, 
1937, p. 25). 

Its much-touted survey of large contributors amounted to scarcely 
more than the mailing of questionnaires to large contributors asking 
for information about additional contributions they might have 
tendered. While the committee alluded to the legal obligation to 
respond, it is obvious that many recipients took this in the same spirit 
with which they had approached compliance with earlier regulations, 
such as the 1925 act itself. 

The results were a travesty. In Houston, Texas, for example, the 
county-level campaign for Roosevelt was actually led by an attorney 
for Humble Oil, the giant (it was larger than all but a handful of 
firms in the industry) affiliate of Standard Oil of New Jersey, while 
other Humble executives contributed to the Democratic campaign. 
My own statistical analysis, discussed below, confirms that oil was 
indeed over-represented among industries that contributed to the 
Democrats. This analysis, however, includes at least some of the 
organizers (e.g., Murchison, Richardson, and others, who acted in 
concert with a substantial number of major oil companies) of a 
scheme to channel oil money from Texas to FDR’s campaign through 
dummy organizations in other states.- 

The oil industry is not the only place where data missing from 
Webber’s particular source could lead one erroneously to conclude 
that “From ‘Normalcy’ to New Deal” is in error. A raft of other, 
virtually certain, Democratic contributors to FDR’s campaign are 
missing from both the public Lonergan Committee report and 
Overacker’s private files. Among them are Joseph P. Kennedy (who is 
mentioned for a loan in Overacker’s records, but who clearly 
contributed large funds); Vincent Astor (who may well have had a 
role in obtaining the Chase loan, since he owned a large bloc of stock 
and served as a director of the bank); and Bernard Baruch. 
Investment banker Sidney Weinberg appears to have raised more 
money for FDR than anyone else, yet he never made the Lonergan 
report, and is listed in Overacker’s private archive as making one 
contribution of $250. Nor do Webber’s tables give any suggestion 
that Sir Henri Deterding, the head of Shell Oil, ardently admired 
Roosevelt (though his influence on the president had passed its peak); 
or that investment banker Clarence Dillon was a “Roosevelt backer” 
in 1936 (Knolige and Knolige, 1978, p. 252).- 

On the Republican side, data on major contributors are also 
egregiously missing. Neither the Lonergan Committee nor Overacker 
record Thomas W. Lamont of J. P. Morgan & Co. as contributing to 
the GOP. Yet careful archival work demonstrates that Lamont was 
deeply involved in the campaign as both contributor and fundraiser. 
(Indeed, his office at 23 Wall Street probably qualifies as the most 
important of all the centers of Republican power in that notably 
polycentric GOP campaign.) Other Republicans who indisputably 
gave large sums to help defeat Roosevelt, including John J. Raskob, a 
founder of the American Liberty League, also contrived to keep out 
of both the Lonergan Committee report and Overacker’s files.— 

Webber’s published tables also show no contributions from some 
very important Roosevelt supporters who actually are listed in 
Overacker’s private files. Some of these provide confirmation of the 
case made in “From ‘Normalcy’ to New Deal,” such as the executives 
from Mobil and Tidewater Oil who contributed (the latter included 
John Paul Getty, who probably controlled the firm even then), or A. 
P. Giannini, head of the Bank of America (whose bank’s archive 
contains copies of several long campaign telegrams of the Democratic 
National Committee that confirm “From ‘Normalcy’ to New Deal”’s 
analysis of the bank’s strong support of FDR, despite Webber’s table 
indicating a Republican tilt for it). It is, of course, true that 
identifying people from unpublished listings can be extremely tricky 
and mistakes are inevitable. However, Webber should have indicated 
that his identifications might be in error, particularly where “From 
‘Normalcy’ to New Deal” plainly indicated strong pro-Roosevelt 
partisanship, as in the Bank of America case, and where it was so 
public (Giannini’s name was prominently displayed on the letterhead 
of the Good Neighbor League, a Roosevelt campaign vehicle). 

I will conclude the general critique of Webber’s claims by 
addressing a question whose final resolution is importantly affected 
by missing data: how best to test, in statistical terms, “From 
‘Normalcy’ to New Deal’”s assertion that capital-intensive, 
internationally oriented businesses were disproportionately favorable 
to the New Deal. 

Webber reduces this question to a hunt for industries close to 
“100%” in favor of the New Deal. These, he claims, do not exist. 
Again, this is simply wrong. Overacker (1937, p. 486) long ago 
concluded, and my analysis confirms, that the capital-intensive, 
export-oriented tobacco industry was lopsidedly Democratic.— So, as 

we shall see, were several other major industries. The vital point, 
however, is that the whole question is a red herring. A sensible 
alternative is easy to find—once again, in my own essays on how to 
test the “investment” approach. 

When I wrote “From ‘Normalcy’ to New Deal” and “Investment 
Theory,” perhaps the most fashionable argument on the relation 
between money and politics was that business normally supported 
both major political parties. Accordingly, “From ‘Normalcy’ to New 
Deal” was carefully worded to permit an interpretation according to 
which the rising power of labor gradually made a bipartisan strategy 
infeasible as more and more businesses found it impossible (i.e., 
unprofitable) to “extend any [more] support to the ‘labor’ party” 
(chapter 2, p. 122 ). A note to that discussion also suggested that 
“most cases of apparent ‘bipartisanship’ rest on undiscriminating 
evidence—usually public campaign expenditure records. In most 
cases, more institutionally subtle behavior signals a preference for 
one or the other candidate.” 

“Investment Theory” analyzed the bipartisan case at length, trying 
to explain when such a strategy made sense and when it did not. For 
present purposes, its crucial claim was that 

Some industries or firms find themselves wanting policies that the other party clearly 
could never accept. Having nothing to gain from bipartisan strategies, these industries 
(or firms) become the “core” of one party, as for example, textiles, steel, and shoes 
were in the Republican Party after the New Deal because of labor policy, and 
chemicals because of trade . . . Other industries or firms, differently situated, can try 
out both parties. But this is the crucial point: rarely equally, (chapter 1, pp. 42-43 ). 

This passage implies that not one but a whole family of statistical 
distributions are potentially useful in testing the investment theory. 
But one empirical regularity was especially illuminating: 

In analyzing the modern Democratic [P]arty . . . one does well to recognize that 
comparatively few firms and industries of any size give anything to the party, and then 
focus sharply on those who do (Ferguson, 1991, p. 254, n. 26). 

The fact that the business community is so heavily Republican can, 
in practice, simplify problems of missing data for large data sets: 
since reliable figures for total expenditures are rare (and more 
institutionally subtle information resists quantification), precise 
quantitative estimates of “how much” most firms in a large sample 
prefer Democrats or Republicans are likely to be spurious. 

Accordingly, one does well to try to avoid the problem in the 
statistical design. Instead, assess, for example, how many investors in 
some bloc of firms of interest (an industry, for example) contribute 
any money at all (above some threshold, perhaps) to the Democrats. 
This virtually always produces a clearly bi- or tri-modal distribution, 
in which some set of firms, industries, or whatever units towers over 
or sinks beneath the rest (i.e., some are also clearly especially 
inhospitable). In such cases, the best statistics to use are often the 
simplest, such as tests that a particular industry or set of firms in fact 
has a rate of contribution significantly above (or below) the rest of 
the sample’s mean.— 

This solution has another point in its favor. There is a powerful 
argument for the proposition that the question of “how much” a firm 
favors either candidate in an election when it contributes to both is 
often the wrong question to ask. That the money arrives at all may be 
the overriding fact, and, even if the amount is less than that donated 
to someone else, it may still be influential. (Indeed, at the margin, it 
may well be more influential.) Certainly, the prospect of losing such 
resources can influence a candidate’s behavior. Or a candidate, if he 
can count on money from a powerful, if perhaps scattered, minority 
of the business community for his stance might gain the means to 
launch a strong campaign that would otherwise be hopeless. 

In terms of “From ‘Normalcy’ to New Deal,” the appropriate 
question thus becomes not whether some industry was virtually 100 
percent Democratic, but whether the percentage of capital-intensive, 
internationally oriented firms supporting FDR and the Democrats 
was significantly higher than the proportion in labor-intensive, 
protectionist industries. 

Webber does not systematically compare results across industries, 
nor does he conduct any tests of statistical significance.— Still, his 
results suggest the possibility that the oil industry had a markedly 
higher rate of Democratic support than, say, steel or textiles. But we 
have also seen that his sample, methods, and over- and under-counts 
of many contributors make it impossible to interpret the results. (In 
addition, it is likely that many of the “smaller” oil firms that happen 
to be on his list—taken, as he says, from Moody’s —were either 
dependent upon or even partially owned by some of the “larger” 
firms, so that it is not at all clear how distinct the two lists really are, 
or who was truly giving the money.) Nor did he even try to test 
“From ‘Normalcy’ to New Deal’”s claims about orientation to the 

world economy. 

There is one way to address the issue: build a new database of 
major investors consisting both of large firms and the wealthiest 
individual investors that incorporates all political contributions in 
whatever form they were made (loans, corporate contributions, 
individual donations, etc.). Then conduct the appropriate statistical 
tests using “wages as a percent of value added” (probably the best 
overall measure of firms’ sensitivities on the labor question) and some 
indicator of a firm’s position in the international economy. 


Ever since “From ‘Normalcy’ to New Deal,” I have been working on 
just such a study. The database and its sources are described in 
appendix 4.1 . For now, it must suffice to observe that the sample has 
been constructed along the lines of my other quantitative studies: a 
basic list of the very largest firms and investors (taking special care to 
include the largest—mostly Texas-based—oil fortunes), supplemented 
in this instance, because textiles, still very important in the 1930s, 
were dominated by small firms, with a special list of firms in that 
industry (I used my replication of Webber’s study). The campaign 
contribution data includes every contribution known to me from any 
reliable source, including not only the individual contribution data 
from the Lonergan Committee and Overacker’s files that Webber 
drew upon, but also Overacker’s invaluable inventory of corporate 
contributions, along with all contributions I have succeeded in 
uncovering in private archives. 

One final issue merits brief mention, before considering the light 
the data shed on the multinationals and the New Deal: the question 
of the time period relevant to collecting data on contributions. 
Webber analyzed contributions that were made between the 
November 1936 presidential election and the previous congressional 
election. For testing “From ‘Normalcy’ to New Deal,” however, this 
time frame is too generous: the Second New Deal does not date from 
earlier than 1935. It was, moreover, not an event, but a complex 
process that certainly was not completed before the scales fell from 
the eyes of Acheson, Clayton, Warburg, et ah, in the final weeks of 
the campaign. (In a deeper sense, perhaps, it did not assume its final 
form until after the wave of strikes and the recession of 1937-38). As 
a practical compromise, I set May 1, 1935, as a cutoff date. This 

marked a period after the tumultuous United States Chamber of 
Commerce meeting, came long after the birth of the Liberty League, 
and was the month in which it became clear that the Wagner Act 
would become law with a (reluctant) presidential blessing. 

Now let us consider what the data say. The critical question is 
easily and compactly answered: capital-intensive, multinationally 
oriented industries clearly supported Roosevelt at rates 
disproportionately higher than the rest of American business. 

Consider first the top of table 4.1 , which reports the average level 
of contributions to each party for the entire group of 405 “investing 
units” (hereinafter “firms,” where this is specifically extended to 
embrace the great private fortunes). The figure for the Democrats is 
32 percent, while the figure for the Republicans is almost twice that 
at 58 percent. Clearly, there are no surprises here: American business 
as a whole supported the GOP in 1936. 

Genuine illumination begins with the next section of table 4.1 . in 
the entries that compare how the Democrats fared across industries. 
The data on industries, arrayed in rough order of capital intensity 
(i.e., low ratio of wages to value added), confirm the pattern 
predicted by “From ‘Normalcy’ to New Deal.” The first cluster of 
industries (in which wages as a percent of value added all average 
well under 30 percent)—tobacco, food, oil, chemicals, and “media” — 
—tells a striking tale: all but heavily protectionist chemicals are far 
(and significantly) above average in supporting the Democrats. 
Clearly, this was friendly territory for FDR. Chemicals, by contrast, 
are far below average in their level of support. 2 

TABLE 4.1. Average Level of Contributions to Each Party (Figures for Particular Industries) 

Food and beverages 

59% (.00) 


17% (.09) 


88% (.00)* 


0% (.01)* 


80% (.00)* 


0% (.16)* 


49% (.01) 


36% (.77)* 


8% (.07)* 

Heavy industry 

13% (.02) 


40% (.45) 



40% (.51) 
40% (.60)* 

Investment banks 

36% (.61) 


23% (.27) 

Largest banks 


8% (.00) 

& Investment 


45% (.09) 


47% (.15) 

Food and beverages 

59% (.97) 


42% (.09) 


25% (.05)* 


73% (.23) 


30% (.07)* 


75% (.50)* 


35% (.00) 


100% (.00)* 


83% (.07) 

Heavy Industry 

83% (.00) 


85% (.01) 



73% (.23) 
70% (.45) 

Investment banks 

73% (.08) 


47% (.18) 

Largest Banks 


56% (.72) 

& Investment 


78% (.00) 


73% (.16) 

Sources: See text. 

Notes: N = 405 firms, as defined in the text. (Based on contribution data from 1,872 
individuals) Republicans—.58; Democrats—.32. Level of significance for difference from 
party’s average level of contribution is in parentheses. 

"'Expected value of cell in chi-square less than 5—warning of low power. 

Most of the other results for separate industries simply reflect what 
we already know: American industry mostly disliked Roosevelt and 
the Democrats. Textiles (many of which are in the South) are 
significantly below average (which, it should be borne in mind, is 
already very low); the separate parts of what can plausibly be 
regarded as heavy industry (coal, steel, mining) are below average, 
but the differences are not statistically significant. This is, however, 
mostly a consequence of sample size: recoding the three as one 
industry (“heavy industry”) immediately yields a highly significant 
result. Virtually all the other industries did not differ significantly 
from the mean in their lack of affection for the Democrats, including 
glass, aluminum, etc. I have, accordingly, dropped them from the 
table. Note, however, that the electrical industry and machinery, both 
export-oriented, along with some other product lines (some export- 

oriented capital goods sectors) have important Democratic 
representation: there simply are not enough cases in many of these 
industries to yield reliable results. One way to get around this 
problem is to collapse categories, so that the totals become large 
enough to be reliable. But this strategy only rarely makes sense: there 
is too much variation among most industries for this to mean much. 
In addition, industry by itself is frequently a poor predictor: variation 
within some industries in regard to labor and trade practices is large. 
A much better idea, realized below, is to aggregate them all and test 
differences between political party contributors for both labor 
sensitivity and international position. 

Some questions about individual industries do arise, but they are 
mostly secondary, and can be neglected here.— Two results that are 
interesting concern utilities, where Roosevelt is unsurprisingly 
abominated, and retailing, which was friendly to the New Deal’s 
efforts to stimulate consumption, at least until the upsurge of 

Also of great interest are the results for investment and commercial 
banking. Both are above average in their support for the New Deal, 
but the results are not statistically significant. On examination, two 
factors appear to account for this. One is the usual sample size 
problem. But the other seems to be connected with features of the 
industry. “From ‘Normalcy’ to New Deal” stressed how the first 
New Deal’s historic Glass-Steagall Act exacerbated tensions within 
the banking community that had arisen during the boom of the 
twenties. Based on many primary sources, the essay identified 
banking rivals of the House of Morgan, particularly the Chase Bank, 
as the principal forces behind that bill’s separation of investment 
from commercial banking (as applied even to private banks, such as 
Morgan). The essay also outlined other aspects of the various New 
Deals that struck at the Morgan interests, notably the 1935 act 
breaking up utility holding companies, and the Federal Reserve Act 
of the same year, in which Chase President Winthrop Aldrich and a 
coalition of other bankers once again stepped into the breach, to 
block the repeal of Glass-Steagall that Morgan and its allies had 

Not surprisingly, although the Morgan bank generally supported 
the administration’s monetary policies and clashed sharply behind the 
scenes over trade policy with the protectionist industrialists that were 
now firing up the GOP, it and its large number of clients and allies 

enlisted in the campaign against the New Deal and, eventually, in 
favor of Landon. 

These facts suggest that a closer look at the data for both 
investment and commercial banking might be appropriate. Nothing 
in “From ‘Normalcy’ to New Deal” implies any particular 
hypotheses about which percentage of either industry does what— 
only that a clear Morgan vs. non-Morgan split exists, and that the 
Morgan faction was and remained enormously influential. The 
Morgan bank had been the leading “brand name” in both industries 
for many years, and vast portions of each were used to doing 
business with it. This suggests that contracting the sample to include 
only the largest firms in commercial and investment banking might 
actually increase the proportion of contributions to the Democrats, 
for many of the lower-ranking firms on both lists had fairly obvious 
ties to Morgan. This was particularly plain in the case of the 
investment houses. My sample included, along with all those on 
Webber’s list, the large firms formed out of Glass-Steagall’s 
mandated divestiture of investment banking affiliates from 
commercial banks. Morgan’s continued influence within these firms 
—if not necessarily its remote “control” of them—was well 
documented by various congressional investigations. So was their 
rather plainly stated collective hope of repealing Glass-Steagall 
(TNEC, 1940a). I also suspected that the largest banks would be 
more willing to run the risk of breaking ranks with Morgan. 

Reducing the sample size, of course, decreases reliability. The way 
around this is to pool data for the ten largest commercial banks and 
the investment banks in Webber’s sample (thus dropping the other 
houses mentioned above, though of course retaining the few large 
private investors in these fields)—creating a special group that might 
be termed the “largest financiers.” As the table entry “largest 
financiers” indicates, polarization does rise, and this time there is no 
question about its statistical significance. The largest investment and 
commercial bankers clearly contribute to the Democrats at 
disproportionate rates compared with business as a whole. (When the 
same test is performed on Republican contributors, on the other 
hand, the rate does not rise, a hint that simple bipartisan strategies 
are not being implemented.) 

The results for the Republicans are less consequential for assessing 
“From ‘Normalcy’ to New Deal.” These findings testify to a vast 
business coalition, with particularly deep veins of support within 

heavy industry, chemicals, manufacturing as a whole (which would 
certainly emerge as statistically significant if the data were pooled), 
and commercial and investment banking. Textiles also show a high 
rate of GOP support, but at a level somewhat below the rest. This 
may reflect some real trend, but is probably due largely to the 
conservative way in which missing data are recorded (and suggests 
that the industry may still be undersampled, or, perhaps more likely, 
that its mostly small firms concentrate their contributions on local 
party committees, and thus are less likely to show up in tabulations 
of national campaign spending). 

On the other hand, in the most capital-intensive sectors, the 
absolute rate of contributions to the GOP is essentially the same as to 
the Democrats in the food industry, and actually below the rate of 
contributions to FDR’s campaign from tobacco, media, and the oil 

The Critical Test 

These findings do not yet add up to conclusive proof that capital- 
intensive, multinationally oriented industry disproportionately 
backed the New Deal. For that one would ideally want measurements 
on both the Democratic and Republican coalitions as a whole with 
respect to both labor sensitivity and trade. 

Such tests, however, are not difficult. Wages as a percent of value 
added are a real number that can be averaged for both coalitions. If 
the Democrats come in lower, “From ‘Normalcy’ to New Deal” is 
correct; is not, it is wrong. Similarly, the trichotomous classification 
used in categorizing firm orientation to the world economy 
—“protectionist” (or, if one is willing to live with some ambiguity, 
“nationalist” [chapter 2, p. 163, n. 27 ]: “internationalist” (export- 
oriented or multinational); and a middle category for cases where the 
distinction is irrelevant or unclear—can easily be ordered and 
assigned numerical values (e.g., protectionist = 0; the middle category 
= 1; multinationals and exporters = 2).— 

It is then a simple matter of averaging each party’s contributors, 
thereby obtaining the other global measure of the difference between 
Republican and Democratic contributors required to test the theory. 

Table 4.2 shows the result: in both cases, the it-test for differences 
between means (with the conservative assumption of separate rather 
than common variances) is significant. As “From ‘Normalcy’ to New 

Deal” predicted, contributors to the Democrats are indeed much less 
labor-intensive than those who donated to Republicans, and they are 
also far more internationally oriented. 

These findings demonstrate a major premise of the investment 
theory of political parties: that it is possible to analyze investor 
coalitions in precise ways that relate directly to policy. Before 
concluding, however, it is appropriate to comment on how sensitive 
these conclusions might be to coding errors or to other problems. 

Coding errors undoubtedly exist, but almost certainly not enough 
to change the results. A conservative classificatory strategy was 
employed which, in several instances, led to decisions not to exploit 
probabilities that seemed likely to favor the main hypotheses (as in 
the case of retailing, mentioned above, which probably implies an 
understatement of the Democratic contributors’ international 
orientation). These figures are, after all, averages of large aggregates. 
In addition, the magnitude of the differences, particularly on the 
internationalism dimension, is impressive. 

TABLE 4.2. T-Tests for Differences in Means of Labor Intensity and Internationalism 
Between Democratic and Republican Contributors—1936 Election 


Standard Degrees (Separate variances) 

Mean Error 7-Value of Freedom (2-tailed) 

Sample Including Banks and Investment Banks 

















Banks and Investment Banks Deleted 





















(. 00 ) 


(- 00 ) 

(- 00 ) 

Sources: See text. 

Nor are these results due to regional effects. Though Domhoff 
(1990, p. 234) has claimed that “From ‘Normalcy’ to New Deal’”s 
analysis is vulnerable in this respect, he is mistaken: statistical tests 

for South/non-South and other likely regional contrasts all failed to 
turn up significant differences, whether performed for all industries at 
once, for oil, textiles, and tobacco separately, or for various 
combinations of them.— 

But there is a final consideration. An implication of “From 
‘Normalcy’ to New Deal” was that the 1936 election set off a 
struggle between two factions for the control of the GOP. One 
faction consisted of the Morgan (and some Rockefeller) interests and 
their allies. This group was frequently difficult to tell apart from the 
Democratic multinational liberals who endorsed Roosevelt in 1936, 
although the Morgans, in particular, had historic ties to very old 
parts of the industrial structure, such as U.S. Steel and many coal 
companies. The other faction was a coalition of heavy industry and 
protectionist chemical companies. 

The latter group’s vision of America’s place in the world, and of 
Americanism as an ideology, differed significantly from that of their 
“allies” in the rest of the party in 1936. In most of the United States, 
however, this group constituted the real core of the GOP. It is 
noteworthy that, as table 4.2 testifies, the gap between the GOP and 
the Democrats widens appreciably when the £-tests are run with the 
data for investment and commercial banks removed. 

It was this gulf, I think, that Acheson, Harriman, Clayton, 
Warburg, and their allies sensed when in 1936 they contemplated 
what the Democratic administration had wrought—social security, 
the Wagner Act, and the tax and other measures—only to conclude 
that a consistent application of the principle of comparative 
advantage led finally to the judgment that the New Deal was the best 
deal for them, the comparatively advantaged. 


Sources of Data 

Two hundred largest nonfinancial firms as of Dec. 31, 1937, from 
TNEC (1940, pp. 346-47); Humble also was included, as an integral 
part of Standard Oil of New Jersey. Two rosters of banks, as 
explained in the text, were used. Shorter list of top 10 banks for 
1940, prepared from Moody’s Bank and Finance Manual from Burch 
(1980, p. 17); longer list of “the leading commercial banks valued 
over $100 million according to company balance sheets in 1936” 

from Webber, 1991, table 5. Textile firms from “leading cotton 
textile companies valued over $10 million” from Webber (1991, 
table 1) and “cotton textile companies valued between $1-10 million 
according to company balance sheets in 1936” (Webber, 1991, table 
2). Shorter list of investment banks from “major investment banks in 
1936” (Webber, 1991, table 4). Longer list adds J. S. Bache; Stone 
and Webster; Halsey, Stuart; Paine Webber; Harris Upham; Field, 
Glore; E. A. Pierce, firms prominently discussed in TNEC 1940a, 
part 22, plus Otis, which emerged as a feisty competitor. Six largest 
insurance companies for 1940 from Burch (1980, 17). (Note that a 
clear break exists between the six and the rest of the industry.) 
Director information came almost entirely from Poor’s (1936), 
though a few firms not listed there had to come from elsewhere, 
including company archives, TNEC listings, or the 1937 Poor’s. 

Procedure was to select the top (first) six officers listed for all 
firms; if by so doing, one was forced into a column or row of vice 
presidents, then all the vice presidents were included, although if 
among the top six officers, the vice president title was supplemented 
by others (e.g., vice-president and treasurer), then the regular vice 
presidents would not be included. This procedure cannot be used for 
all banks because of the enormous number of vice presidents; in these 
cases, the list of top officers had to be cut at whatever seemed a 
reasonable point in the organizational chart after at least five 
officials. (For the investment houses all partners were included; 
though I should prefer to weight them by their shares of the business, 
data limitations make this impossible.) All inside directors of 
whatever position were included, along with owner-directors. 
Ownership data (to eliminate outside directors and retain owner- 
directors) generally follows Burch’s review of the TNEC data (Burch, 
1972, appendix A) with very minor changes based on my own work. 
In a very few cases where the owner was clearly influencing the 
company although not on the board, he or she was included (the 
outstanding case is Eugene Meyer at Allied Chemical). Also, the 
relatively few people who served on more than one board were 
treated as separate observations on their respective “investor units” 
(“firms,” as the text explains); the same was true for the handful of 
directors who overlapped with the separately prepared list of large 

List of large investors: compiled from (Lundberg, [1938] 1946, pp. 
26-27), which drew in part from federal tax data for 1924; after long 

review of various possible changes discussed in sources analyzed in 
Lundberg (1968) and Burch (n.d.), three changes made in list of 
families: Harriman added; Lundberg’s own portmanteau “Standard 
Oil group” of various lesser investors in the old company (not 
including Rockefeller or Harkness) deleted, save for Bedford; J. P. 
Morgan Jr. replaced Lundberg’s “Morgan inner group”). Because 
this list dates from the early twenties, it misses the effect of the boom, 
the Depression, and, especially, the East Texas oil discoveries. A 
partial correction for these omissions is to add the names on the list 
of “Taxpayers with Largest Net Income, 1941” (from unpublished 
Treasury documents) in Brandes (1983, table I); a few spouses that 
appeared as two entries were consolidated into one. Also, where 
Brandes indicated a definite company as a primary source of a 
person’s income, contributions from that company were also checked 
where appropriate in light of the connection indicated. (Note that the 
list strongly supports Lundberg’s earlier assessments; and that the 
observation in Brandes [1983, p. 310] that Sid Richardson, although 
the third largest taxpayer in 1941, may not have reported any net 
income in 1936 is almost surely an artifact—independent oilmen very 
commonly ran [and still run] paper “losses” for several years in a 
row.) This list of only 100 people, however, is for the United States 
as a whole, and thus still fails to catch most of the Southwest titans. I 
hoped briefly that Texas Railroad Commission data might fill the 
gap, but the Commission claims not to have the requisite records. 
Recalling that the New Deal oil kings first reached general attention 
in the early 1950s, and that the statistically critical imperative is to 
avoid biasing the list, not that of finding an exactly contemporary 
roster, I added the oil-related names from two early Fortune (1957, 
p. 177; 1968, p. 156) lists of the largest American fortunes, along 
with the revisions for that industry only suggested by two critics of 
the Fortune efforts that I consider particularly well informed: 
(Lundberg, 1968, p. 42-44, 68-78) and Burch (n.d., appendix C and 
chart). The latter I have tried to use with the caution befitting an 
excellent study that has not been revised for publication. 

Data for “wages as a percent of value added” follow the discussion 
( chapter 2 ) and are subject to all the qualifications entered there. The 
essential problem is that figures are available only for industries, not 
for firms. A further problem is that the 1929 Census for 
Manufacturers uses a different industry code from later censuses, thus 
the very valuable and convenient study from which I drew virtually 

all of the data for manufacturing (Bliss, 1939, appendices) is 
sometimes difficult to correlate with later analyses of firms by 
industry code (as in Chandler [1990], although a preliminary set of 
the Chandler data were kindly made available to me; and I have used 
this data to refine estimates for a few firms where it was unclear in 
which of Bliss’s industry categories they belonged). Bliss, however, 
very helpfully distinguishes large plant industries, which is a valuable 
indicator of the presence of large firms. Non-manufacturing data are 
from diverse sources, and are probably less reliable because many 
mineral industries engage in both extraction and refining, thus 
mixing industries in a way that is difficult to sort out. In addition, the 
mining industry commonly shed labor massively in the Depression, 
dramatically altering the way several industries functioned. Figures 
for wages as a percent of value added in mining for all but copper 
(which follows the table in chapter 2, p. 120 ) and the one firm that 
produced sulphur (where the figure for refining in Bliss required 
consideration) come from the appropriate Depressionera entries in 
the 1967 Census of Mineral Industries (1970). Where a large change 
in the labor dimension appeared, I interpolated between the figures 
for 1929 and 1939 on a straight-line basis, so that the former would 
not make the firms look more labor-intensive than they were (i.e., so 
that my main hypothesis would not be too easily confirmed). I have 
been unable to locate useful calculations of wages as a percent of 
value added for utilities or railroads. A rough but usable estimate for 
retailing in 1929 can be derived from (Barger, 1960, p. 330): The 
data in his table 3 might reasonably be adjusted in various ways; my 
procedure was to add a (conservative) 20 percent of his figure for 
“unincorporated profits” to his estimate of “employee 
compensation” to arrive at a final figure for “wages” (which is then 
divided by the same table’s figure for value added). Wages as a 
percentage of value added are rarely calculated in the financial sector: 
the largest item of expense is usually interest costs, and wages make 
up only a fraction (in investment banking, a particularly minute 
fraction) of total compensation costs, which often include part of 
what should properly be accounted profits. Available statistics for the 
thirties, however, present special problems. First, the earnings and, 
especially, the costs that banks reported in the standard Federal 
Reserve sources were greatly influenced by tax and regulatory 
considerations (e.g., write-offs of securities) that if anything were 
becoming even more important as asset values collapsed. Second, as 

interest rates fell over the course of the Depression ( chapter 3 ; 
Epstein and Ferguson, 1991) the structure of bank income statements 
and balance sheets became peculiar indeed, so that one can produce a 
wide range of figures for wages as a percent of value added by simply 
varying the year. In these circumstances, the most sensible thing to do 
is to settle on a value that could reasonably be taken to represent the 
“normal” case that could guide behavior in the long run: for 
investment banking, this implies perhaps a value of 10 percent; for 
commercial banking, with its larger labor force, perhaps 15 percent. 
But how to treat insurance, with its flock of agents, was obscure, and 
I made no assignment for it. (This imprecision makes no difference to 
the statistical results reported in the text. Institutions in the same 
industry are counted the same for both parties, and, as table 4.2 
indicates, removing the financial sector actually widens the 
differences in labor intensity between the parties.) 

The coding of firms’ orientation to the world economy again 
follows “From ‘Normalcy’ to New Deal” closely, with that essay’s 
warnings and qualifications underscored. This time, however, the 
effort was simplified. Firms were classified into one of three 
categories. The first contained those that seemed clearly protectionist 
or, perhaps, “inward looking” in the sense of Galbraith (1989); the 
second, its polar opposite, contained successful “outward” oriented 
multinationals and exporters favoring free(r) trade. In the middle 
were classed firms for which these classifications either made little 
sense or were heavily attended with uncertainty. No standardized 
databases exist that are usable; no alternative exists but to investigate 
firms using whatever data are at hand. Two works, however, were 
very helpful: Chandler (1990) and Wilkins (1974) for cases in which 
not enough other sources existed. (Note, however, that the latter’s 
tables of “multinationals,” while perfectly sensible for her treatment, 
cannot be used here without major modification: they include many 
firms that simply control mineral deposits abroad, often out of 
defensive motivations, and that were often prominent champions of 
the tariff). It is also important to assess carefully the implications of 
the various cartels that filled the interwar period—for some firms in 
cartels (e.g., General Electric) qualify as “multinationals” in the 
relevant sense of this essay. Others—as in most of the chemical 
industry—definitely do not. The turn in the copper industry (chapter 
2, n. 27 1 in the thirties is of significance: I believe similar changes in 
sentiment affected virtually the entire class of minerals producers. 

Finally, it should not be necessary to say that a degree of uncertainty 
and disagreement about how cases are classified is only to be 
expected and that classifications of firms at different points in time 
even in the Depression sometimes changed sharply as the economy 
rose or fell ( chapter 2 ). 

The cutoff for contributions was $100, though, as the text 
indicates, many contributions ran far above that. Scarcely anyone in 
the sample was recorded as giving less than $100 in total, 
incidentally. Loans were also included. Of course, the observations in 
the text about known contributors in the 1936 campaign who are 
missing from Overacker’s files refers to the time period for 
contributions defined in the text; other parts of the files cover 1932 
and other years, but are irrelevant for this paper. 


The author gratefully acknowledges the very kind assistance rendered 
him by Herbert Alexander and the staff of the Citizens Research 
Foundation at the University of Southern California and other aid 
from Edmund Beard, Gerald Epstein, and Richard Freeland. The 
John W. McCormack Institute of the University of Massachusetts, 
Boston, provided modest, but very timely, financial support. Special 
thanks to Benjamin Page, for reading a draft under trying conditions, 
and Goresh Hosangady, for invaluable assistance with the statistics. 


Allen, Michael Patrick, 1991. “Capitalist Response to State Intervention: Theories of 
the State and Political Finance in the New Deal.” American Sociological Review 

Barger, Harold. 1960. “Income Originating in Trade, 1869-1929.” Pp. 327-333 in 
Trends in the American Economy in the Nineteenth Century, Studies in Income 
and Wealth, vol. 24, National Bureau of Economic Research Conference on 
Research in Income and Wealth. Princeton: Princeton University Press. 

Bliss, Charles A. 1939. The Structure of Manufacturing Production. New York: 
National Bureau of Economic Research. 

Borchardt, Knut. 1991. Perspectives on Modern German Economic History and 
Policy. Translated by Peter Lambert. New York: Cambridge University Press. 

Brandes, Stuart. 1983. “America’s Super Rich 1941” The Historian 45:307-323. 

Burch, Philip. 1972. The Managerial Revolution Reassessed. Lexington, MA: D.C. 

-. 1980. Elites in American History, Vol III. New York: Holmes & Meier. 

-. n.d. “Appendix C, with Table A” [Review of Studies of the Very Wealthiest 

Americans]. Unpublished manuscript. 

Chandler, Alfred D., Jr. 1990. Scale and Scope: The Dynamics of Industrial 
Capitalism. Cambridge, MA: Harvard University Press. 

Coelho, Philip and G. J. Santoni. 1991. “Regulatory Capture and the Monetary 

Contraction of 1932: A Comment on Epstein and Ferguson.” Journal of Economic 
History 51:282-289. 

Cumings, Bruce. 1990. The Origins of the Korean War: Volume II: The Roaring of 
the Cataract. Princeton: Princeton University Press. 

Domhoff, G. William. 1990. The Power Elite and the State. New York: Aldine De 

Epstein, Gerald and Thomas Ferguson. 1984. “Monetary Policy, Loan Liquidation, 
and Industrial Conflict: The Federal Reserve and the Open Market Operations of 
1932.” Journal of Economic History 44:957-983. 

Epstein, Gerald and Thomas Ferguson. 1991. “Answers to Stock Questions: Fed 
Targets, Stock Prices, and the Gold Standard in the Great Depression.” Journal of 
Economic History 51:190-200. 

Ferguson, Thomas. 1980. “Von Versailles zum New Deal” Pp. 436-450 in Amerika: 
Traum und Depression 1920/40, catalogue essay for the Neue Gesellschaft fur 
Bildende Kunst Exhibit of American Art. Berlin and Hamburg. 

-. 1983. “Party Realignment and American Industrial Structure: The Investment 

Theory of Political Parties in Historical Perspective.” Pp. 1-82 in Research in 
Political Economy: Volume VI, edited by Paul Zarembka. Greenwich, CT: JAI 

-. 1984. “From ‘Normalcy’ to New Deal: Industrial Structure, Party Competition, 

and American Public Policy in the Great Depression.” International Organization 

-. 1986. “Elites and Elections: Or What Have They Done to You Lately? Toward 

an Investment Theory of Political Parties.” Pp. 164-188 in Do Elections Matter ? 
edited by Benjamin Ginsberg and Alan Stone. First edition. Armonk, NY: Sharpe. 

-. 1989a. “Industrial Conflict and the Coming of the New Deal: The Triumph of 

Multinational Liberalism in America.” Pp. 3-31 in The Rise and Fall of the New 
Deal Order 1930-80, edited by Steve Fraser and Gary Gerstle. Princeton: Princeton 
University Press. 

-. 1989b. “By Invitation Only: Party Competition and Industrial Structure in the 

1988 Election. Socialist Review 19:73-103. 

-. 1991. “An Unbearable Lightness of Being—Party and Industry in the 1988 

Democratic Primary.” Pp. 237-254 in Do Elections Matter ? edited by Benjamin 
Ginsberg and Alan Stone. Second edition. Armonk, NY: Sharpe. 

-. 1992. “Money And Politics.” Pp. 1060-1084 in Handbooks to the Modern 

World: The United States, vol. 2, edited by Godfrey Hodgson. New York: Facts on 

-. n.d. Critical Realignment: The Fall of the House of Morgan and the Origins of 

the New Deal. New York: Oxford University Press. Forthcoming. 

Ferguson, Thomas and Joel Rogers. 1986. Right Turn: The Decline of the Democrats 
and the Future of American Politics. New York: Hill & Wang. 

Floud, Roderick. 1973. An Introduction to Quantitative Methods for Historians. 
London: Methuen. 

Fortune Magazine. 1957. “The Fifty-Million-Dollar Man.” November: 177. 

-. 1968. “America’s Centimillionaires.” May: 156. 

Galbraith, James. 1989. Balancing Acts. New York: Basic Books. 

Hogan, Michael. 1986. “Corporatism: A Positive Appraisal.” Diplomatic History 

-. 1987. The Marshall Plan: America, Britain, and the Reconstruction of Western 

Europe 1947-52. New York: Cambridge University Press. 

Jarausch, Konrad and Kenneth Hardy. 1991. Quantitative Methods for Historians. 

Chapel Hill: University of North Carolina Press. 

Knolige, Kit and Fredericka Knolige. 1978. The Power of their Glory. New York: 
Wyden Books. 

Kotz, David. 1978. Bank Control of Large Corporations in the United States. 

Berkeley: University of California Press. 

Kurth, James. 1979. “The Political Consequences of the Product Cycle.” International 
Organization 33:1-34. 

Lundberg, Ferdinand. [1938] 1946. America’s Sixty Families. New York: Citadel. 

-. 1968. The Rich and the Superrich. New York: Lyle Stuart. 

Malone, Michael P. 1975. “The Montana New Dealers.” Pp. 240-268 in The New 
Deal, Volume II: The State and Local Levels, edited by John Braeman, Robert 
Bremner, and David Brody. Columbus, OH: Ohio State University Press. 

Magee, Stephen, William Brock and Leslie Young. 1989. Black Hole Tariffs and 
Endogenous Policy Theory. New York: Cambridge University Press. 

McKelvey, Richard and Peter Ordeshook. 1986. “Information, Equilibrium, and the 
Democratic Ideal.” Journal of Politics 30:909-937. 

Overacker, Louise. 1937. “Campaign Funds in the Presidential Election of 1936.” 
American Political Science Revieiv 31:473-498. 

-. 1946. Presidential Campaign Funds. Boston: Boston University Press. Poor’s 

Register of Directors of the United States and Canada. 1936. New York: Poor’s 
Publishing Company. 

Roosevelt, Elliott and James Brough. 1975. A Rendezvous ivith Destiny. New York: 

Schwarz, Jordan. 1981. The Speculator. Chapel Hill: University of North Carolina 

Sorauf, Frank J. 1988. Money in American Elections. Boston: Scott Foresman/Little, 

Stone, Lawrence. 1971. “Lawrence Stone and the Manors: A Rejoinder.” Economic 
History Revieiv 24:115-116. 

Temporary National Economic Committee. 1940a. Hearings before the Temporary 
National Economic Committee. 76th Congress, 2nd Session. Part 22: Investment 
Banking. Washington, DC: U.S. Government Printing Office. 

-. 1940b. Investigation of Concentration of Economic Power. Monograph 29. The 

Distribution of Ownership in the 200 Largest Nonfinancial Corporations. 
Washington, DC: U.S. Government Printing Office. 

U.S. Bureau of the Census. 1970. U.S. Census of Mineral Industries: 1967, Industry 
Series. Washington, DC: U.S. Government Printing Office. 

U.S. Congress. Senate. 1937. Report of the Special Committee to Investigate 
Campaign Expenditures of Presidential, Vice-Presidential and Senatorial 
Candidates in 1936. 75th Congress, 1st Session 1936, S. Rept. 151. 

Webber, Michael. 1991. “Business, the Democratic Party, and the New Deal: An 
Empirical Critique of Thomas Ferguson’s ‘Investment Theory of Politics.’” 
Sociological Perspectives 34:473-492. 

Weir, Margaret and Theda Skocpol. 1985. “State Structures and the Possibilities for 
‘Keynesian’ Responses to the Great Depression in Sweden, Britain, and the United 
States.” Pp. 107-163 in Bringing The State Back In, edited by Peter Evans, Dietrich 
Rueschemeyer, and Theda Skocpol. New York: Cambridge University Press. 
Wilkins, Mira. 1974. The Maturing of Multinational Enterprise: American Business 

Abroad from 1914 to 1970. Cambridge: Harvard University Press. 


By Invitation Only: Party Competition and 
Industrial Structure in the 1988 Election 

THE EARLY YEARS of the “Reagan revolution” witnessed one of 
the great public relations campaigns in U.S. history. From almost 
every quarter of American public life, not only obviously interested 
parties—the White House, the Republican Party, or most big business 
circles—but also virtually the entire press, many social scientists, and 
even many prominent Democrats rushed to proclaim that the U.S. 
electorate had shifted dramatically to the right. 

It was a long time before these claims were subjected to 
quantitative testing by the normal methods of public opinion 
analysis. When they were, however, the results were startling. By 
simply lining up time series data, it was easy to show that the U.S. 
public had not made a “right turn.” On the contrary, the basic 
structure of postwar political opinion remained remarkably stable. 
Most voters continued to shy away from the “liberal” label, but they 
were still very suspicious of “big business” and supportive of 
government intervention in the economy and many areas of social 

New Deal issues continued to attract them. Most opinion changes 
were quite gradual, and often, in a broadly liberal direction. 
Opinions on taxes and some social welfare issues occasionally 
suggested that the electorate was skeptical of new initiatives, but 
there was no popular support for laissez faire. Above all, Ronald 
Reagan was far from being the most popular president of modern 
times. Nor was he uniquely beloved by people who disagreed with his 

The modern theory of critical realignments in U.S. politics is a 
flexible, even protean, system of thought. But there is no place in its 
conceptual apparatus for a smashing loss of the Senate by the party 
that is identified as triumphantly ascendent. For a while, therefore, it 
was possible to hope that the tidal wave of Democratic Senate 
victories in 1986, including a spectacular victory in Georgia by a 
biracial coalition much concerned with economic issues, might 
function in U.S. politics a bit like the famous eclipse observations of 

1919 did in the debates over Einstein’s theory of relativity.- 

But political commentators in the United States can often resist 
anything except temptation. While many post-election analysts drew 
attention to the opaque, almost “issueless” character of the 1988 
campaign, a second wave of Reagan realignment studies is beginning 
to crest. 

The best known of these are flimsy indeed. The postelection revival 
of the myth of Reagan’s overwhelming popularity, for example, is 
easily refuted by the simplest arithmetic: the Great Communicator’s 
average popularity falls 16 percentage points below Franklin D. 
Roosevelt’s, 14 points below Dwight D. Eisenhower’s, and 18 points 
below John F. Kennedy’s. It is even 2 points below Lyndon Johnson’s 
average, and a bare 5 points above the much despised Jimmy 

Another claim widely touted in the latest Reagan revival, that non¬ 
voters preferred George Bush to Michael Dukakis, is also almost 
certainly wrong. What is probably the best instrument for directly 
ascertaining the opinions of nonvoters, the Gallup poll’s final pre¬ 
election surveys of who is likely to vote, indicates that in 1988, as in 
most elections since the New Deal, substantially more nonvoters than 
voters preferred the Democrats. Nor is there much evidence for the 
common claim that young voters are becoming the avant garde of 
tomorrow’s Republican majority. In the 1988 election, voters 
between 18 and 29 years of age gave fewer votes to Bush than any 
other age group except those over 60.^ 

More serious efforts attempt to locate a mass basis for Reaganism 
in either the revival of fundamentalist Christianity or racial 
antagonisms. Close readers of even the very best of these studies, 
however, will notice a striking fact: that direct evidence of the 
importance of either race or fundamentalism in anyone’s voting 
decision is scarce indeed.- 

Though space limitations make it impossible to pursue the point 
here, when voters’ decisions are analyzed properly, with a method 
that allows alternative bases for the voting decision, the new views 
turn out to be as chimerical as the old. It is not race, or the flag, (or 
the “L-word,” or foreign policy) that is killing the Democratic Party 
at the presidential level. Instead, since Carter, the Democrats have 
forfeited their ancestral identification as the party of prosperity. With 
its continuing flirtation with austerity and raising taxes, while 

refusing to challenge the GOP on important New Deal issues, the 
party has had little to say to ordinary Americans on many issues that 
matter most to them.- 

But if voters were not responsible for the eerie silence that left 
many of them more anxious about Dukakis’s economic policies than 
Bush’s, or for what even the media recognized as “the mysterious 
disappearance of issues” during the primaries (Jesse Jackson 
obviously aside), then who or what was? And what does Bush, the 
man who left no tracks in the primaries, stand for? 

These are the questions I propose to tackle in this chapter. Relying 
on the investment approach to party politics developed in earlier 
essays and using data from the Federal Election Commission and 
other sources, I attempt to apply the “Golden Rule” to the 1988 
presidential election: To see who rules, follow the gold.- 


It is convenient to begin with the Republicans, for the divisions that 
surfaced within the business community over the 1988 election 
follow immediately from policy dilemmas that emerged as a direct 
consequence of decisions taken in the earliest days of the Reagan 
revolution. At that time, the height of what might be termed the 
laissez-faire revival, the incoming Republican administration sought 
sweeping changes in both U.S. society and the world order. In the 
name of restoring domestic economic growth, it sought major cuts in 
taxes on high incomes and corporations, rollbacks in environmental 
and safety regulations promulgated in the seventies, major reductions 
in federal ownership and spending, and a broad deregulation of the 
economy, including major changes in the administration of the 
National Labor Relations Board (NLRB). 

Its ambitions, however, did not stop at the water’s edge. It planned 
to make not only the United States, but the world, safe for free 
enterprise (which it equated with “economic growth”). To reverse 
what it claimed was a decline in U.S. power around the globe, the 
administration commenced the largest military build-up in history, 
with a particular focus on the navy. It heated up the cold war, 
pressuring Europe and Japan to rearm and restrict exports to the 
Soviet bloc. It also sought to roll back the tide of state-owned 
enterprise in the Third World and to pressure other countries to 
deregulate their own markets, especially in finance. It also 

aggressively intervened in various Third World trouble spots in favor 
of regimes it preferred. 

The almost millenarian frenzy with which the administration 
approached these labors in its early days invited analysts—friends 
and critics alike—to view it as a political formation sui generis. 
Critics, in particular, tended to treat Reaganism as the political 
program of a newly unified business community. 

For a few months of 1980 to 1981, this line of thought is not 
misleading. A global analysis of Reaganism in these terms, however, 
courts serious misunderstanding. It makes it impossible to understand 
the dynamics of the two Reagan terms with the abrupt switch toward 
detente and inter-allied economic cooperation during the second 
term, or to analyze the forces now bearing on the Bush 

The truth is that the Reagan coalition always had a huge seam 
running down its middle. That seam, the consequence of living in the 
world economy, divided the Reagan camp into two distinct blocs 
(each of which, in turn, was crisscrossed by other seams too 
complicated to discuss now). The policies of the Reagan 
administration served, or appeared to serve, the interests of major 
parts of both. Each, however, had a somewhat different 
interpretation of what it thought was really happening, and the two 
basically disagreed about where the policies were supposed to lead. In 
effect, the Reagan revolution was a giant banner, under which two 
columns marched in different directions. 

The first “bloc” might be referred to as the “protectionist” bloc.- As 
the label suggests, this bloc, centered in old industries long tied to the 
GOP, like textiles or steel, saw the Reagan revolution largely as 
political and economic Alka-Seltzer: Relief from imports, from labor, 
from hated government regulators, and, perhaps, from endlessly 
menacing Communists was only a jubilant swallow away. 

In sharp contrast, the second bloc, or more precisely, its leading 
spokespersons, were thinking far more expansively (and they were 
indeed thinking, in the sense that all through this period they were 
making major investments in policy-oriented research published 
through a wide variety of think tanks and research institutions). 

To sum up the views of this second, multinational, bloc in a few 
pithy sentences inevitably invites caricature and risks exaggerating 
the degree of centralization and consensus within it. Nevertheless, 

with due allowance for these pitfalls, its thinking can be analyzed as 
the polar opposite of the now fashionable “imperial overextension” 
critique of Reaganism brought to public attention most forcibly by 
the historian Paul Kennedy in his recent The Rise and Fall of the 
Great Powers.— 

It is not that the business leaders (organized in such groups as the 
Committee for the Present Danger) who in 1980 were calling for a 
600-ship navy, worldwide “horizontal escalation” in the event of war 
with the Soviet Union, major new weapons modernization programs, 
and an end to the “Vietnam syndrome” necessarily shrank from 
analogies with the Dutch, French, or British empires. It is that they 
saw and, with some qualifications, continue to see the comparison 

In their view, the overriding issue in the world was whether the 
three great economic areas (the Pacific Basin, the Americas, and 
Western Europe) were going to develop “cooperatively” into one 
essentially “worldwide” multinational market, or whether these areas 
would go their own ways, each under the influence of a regional 
hegemon. How this issue was resolved would shape development in 
the Third World, and in the long run perhaps even in the Second. 

From this standpoint, the vast U.S. expenditures on military force 
and foreign aid that critics of imperial overextension feared would 
bankrupt the United States actually represented major investments in 
free trade and an integrated world economy committed to a dollar 

Not only would these investments help stabilize the Third World 
(and thus lower the target rate of return a multinational required 
before deciding to invest), but the military build-up, in addition, was 
a vital U.S. bargaining chip with the other major allied governments. 
Only the United States could afford the fabulous costs of the 
conventional and nuclear guarantees that provided the social 
overhead capital for the postwar recoveries of Japan and Western 
Europe. And only the United States could project enough force into 
the Middle East to protect the oil supplies of the allies. 

As long as the United States maintained its military dominance, 
therefore, European governments had little incentive to try to go their 
own way, and many reasons to cooperate. So did the Japanese, a fact 
which by 1980 had become of towering significance to many U.S. 
businesses, which were increasingly convinced that exclusion from 

the Pacific implied banishment from the next century’s fastest- 
growing region. 

In the late seventies, after the West German refusal to reflate in 
tandem with the United States and Japan wrecked the Bonn summit, 
most members of the second bloc, which included multinational 
manufacturers and financiers, but also many exporters, high-tech 
firms, oil companies, and weapons producers, became convinced that 
only dramatic unilateral action by the United States could break the 
economic deadlock that was developing in the “triad” (today’s 
buzzword) or “trilateral” (yesterday’s) world and avert the drift 
toward state-owned enterprises in the Third World. With increasing 
talk of repricing internationally traded raw materials (read: oil) in 
another currency as U.S. rates of inflation raced ahead and the dollar 
depreciated, these businesspeople also became convinced that only 
truly draconian monetary policies could end inflation and save the 

The atmosphere of intensifying crisis enormously advantaged the 
only political party for which massive social expenditure cuts were 
thinkable: the GOP. Multinationals which had been perfectly 
prepared to support Democrats during the New Deal era abruptly cut 
off their support, or intensified their commitments to Republicans. At 
the same time, so did the traditional protectionist bloc. Not 
surprisingly, the first result was confusion, as all sorts of “New 
Right,” “Old Right,” and “neoconservative” cultural and political 
entrepreneurs competed to tap the rivers of cash that rapidly began 

Under the inflexible pressure of political deadlines, however, a 
more or less articulate compromise emerged within the Republican 
Party. Candidate Reagan struck a formal agreement with South 
Carolina Senator Strom Thurmond on behalf of the textile industry, 
and appears to have made promises to several other industries, 
including steel, while publicly trumpeting the merits of free trade. 
The prospective general revision of the General Agreement on Tariffs 
and Trade (GATT) ardently desired by the free traders was put off 
until after the administration had some time to force restructuring on 
the rest of the world, while powerful industries were promised 
piecemeal protection in the meantime. 

By temporarily removing the divisive trade issue from the agenda, 
this deal (which was struck by Reagan rather than by Bush, the first 
choice of many multinationalists in the “Eastern establishment”) 

opened the way for the “golden horde” that financed the GOP’s 
sweeping triumph in the fall of 1980. Once the decision to raise 
interest rates was taken by Federal Reserve Chairman Paul Volcker 
during the Carter administration, for example, what multinational 
would object to domestic restructuring? And, while contemplating 
the promised import relief, what protectionist would object to a new 
cold war? From this vantage point it is easy to see the logic that 
drove the Reagan administration first to foreswear G5 (later G7) 
cooperation and noisily to denounce the “evil empire,” and then, in 
early 1985, as James Baker took over at the Treasury, dramatically to 
reverse both policies. 

As it came to power, the administration faced a set of decisions 
that could easily split its coalition apart. Not surprisingly, it moved 
very cautiously. To the disgust of Secretary of State, Alexander Haig, 
it declined to make a major issue of Central America at that time. To 
the dismay of social conservatives, it placed social issues on the back 

The Reagan administration concentrated instead on economic 
issues that sent broad rivers of cash flowing to all its supporters in 
the business community: the military build-up, deregulation, 
personnel changes at the NLRB, and the centerpiece of its economic 
program, the famous tax cuts. After some fits and starts, the Reagan 
administration fell in line with Volcker’s high interest rate policies.— 

The result, from the administration’s standpoint, was a series of 
striking successes. Along with its new labor policies and deregulation, 
the high interest rates triggered a sweeping reorganization of the 
workforce. Unions lost ground and wage growth slowed, as many 
firms took advantage of the huge rise in unemployment to make 
major cuts in staffing and changes in work rules. As other central 
banks transmitted the interest rate rises to their countries (and, 
pushed by the Reagan administration, promoted deregulation of their 
own economies), a worldwide movement toward laissez faire gained 
steam. The growing climate of austerity, in turn, encouraged further 
cuts in social spending and taxes everywhere, while the rise of the 
dollar reestablished its position as the world’s currency, and started 
an export boom in Europe and Japan that helped undo the damage 
caused by the “evil empire” rhetoric. 

The policies, however, could not be sustained forever. The price of 
the interest rate rise was the deepest recession of the postwar era. In 
the Third World, growth ceased absolutely, while in the United States 

imports flooded in and business bankruptcies mounted, bringing 
friction with Japan and calls for import relief. Although they went 
along with the intermediate-range nuclear forces (INF) deployment, 
Europeans resented the administration’s efforts to discourage 
business with the Soviets. And, as it seems clearly to have foreseen, 
the administration failed to get enough spending cuts to offset the tax 
reductions, leading to an enormous rise in the budget deficit. 

Political opposition emerged on both the left and the right of the 
business community. On the left, the Democrats revived. A 
breakdown of 1984 Democratic campaign financing, done along lines 
of that presented for 1988 below, shows clearly how real estate 
interests in (primarily) the Northeast and Midwest moved to defend 
federal grants for urban infrastructure and mass transit from the 
burgeoning claims of the defense budget. (Statistical tests showed that 
the real estate bloc, but not the other industries that also featured 
high levels of Democratic contributions, only supported liberals— 
precisely what one would expect if competing claims on the budget 
were the issue.)- And as the deficit mounted, many investment 
bankers (and some insurance industry figures) joined them.— 

On the right, Jack Kemp emerged as a champion of a “supply- 
side” economics that was essentially Reaganomics with low interest 
rates. For business, its key claim was that if interest rates were 
pushed low enough, the United States could grow its way out of the 
deficits without any new taxes. 

How the administration rode out this heavy weather bears close 
analysis for the light it can shed on what the Bush administration 
might do. To defuse protectionist sentiment, it deployed a three¬ 
pronged strategy: To the biggest and most powerful industries, 
notably steel and autos, it afforded continued piecemeal protection. 
To agriculture and some exporters, it offered limited export 
subsidies, either in the form of direct loans, or, in the case of some 
high-tech industries, funds for basic research. Finally, it pressed other 
countries, particularly in East Asia, to open their markets to U.S. 

Faced with the need to hold together two blocs pulling in different 
directions, the administration also made a set of fundamental choices 
on the deficit. Because the tax cuts were so attractive to both blocs, 
but particularly to the protectionists, who were, after all, fated to be 
submerged in the long run, they provided the perfect issue over which 

to make a stand. Still hoping that ballooning deficits would 
eventually force spending cuts, the Administration proceeded, loudly 
and publicly, to draw a line in the sand. 

To finance the deficits in the meantime, the administration devised 
a two-track strategy. First, it accepted “revenue enhancements” that 
did not threaten the sacrosanct position of the top brackets, including 
a steep rise in highly regressive social security taxes, which over time 
were intended to help close the deficit. Then, in a truly momentous 
decision, it elected to let foreign capital finance the deficit. 

From the standpoint of the multinational bloc as a whole, this 
move had a compelling logic. By worldwide standards, direct 
investment in the U.S. economy was quite low. Direct investment, in 
sharp contrast to portfolio investment, is reasonably stable. Here, 
accordingly, was a chance to square the circle. Provided no one 
moved to prohibit foreign takeovers, capital could flow into the 
United States for years. As it did, it would support the dollar, while 
helping mightily to finance both the trade and the government 
officials. As it did these things, it would also create a more powerful 
lobby in the United States in favor of free trade and an integrated 
world economy, while also giving major foreign interests compelling 
reasons to let U.S. multinationals continue operating in their home 

As interest rates fell in the wake of the Mexican debt rescue and 
defense spending began to pull the economy out of its slump in 
classic Keynesian fashion, the administration had the satisfaction of 
watching its new policies pay off. The economic revival and foreign 
buying led to a tremendous boom in the stock market. The new wave 
of mergers and takeovers, in turn, further restructured industry while 
creating a substantial number of new fortunes in finance and 
commodities markets with a stake in Reaganomics. 

The boom, an ingredient of the largest political business cycle since 
the Depression, carried the administration safely through the 1984 
elections. The continued strength of the dollar, however, fueled 
protectionist sentiment, further inflaming relations with Japan and 
the Asian NICs (newly industrializing countries). By early 1985, it 
was obvious that something had to be done, or the whole postwar 
structure of multinational trade might unravel as the U.S. Congress 
moved to retaliate. 

The administration moved on several fronts at once. First, it added 

wrinkles to the strategy it had employed for defusing relations with 
Japan in 1983-1984. It pressed the Japanese to open markets for a 
handful of the most impatient sectors whose support it was counting 
on to head off a protectionist upsurge, including telecommunications, 
electronics, forest products, medical instruments, and 

Next, as an alternative to “industrial policy,” the administration 
joined many Republican big business leaders in talking up 
“competitiveness,” that is, the notion that improved macro policy 
and some broad structural changes (such as improvements in 
education) that involved little direct market intervention might 
alleviate the overseas challenge. 

Then, largely through the Pentagon (but mostly outside “Star 
Wars”), where, by a miracle of nomenclature, “defense”-related 
production direction is not reckoned as a violation of the principles 
of free enterprise, it announced a spectacular program of subsidies, 
again mostly to “swing” industries dominated by multinationals in, 
or potentially in, the coalition. Among these projects, which 
continued to be announced as Bush geared up to run for the 
presidency, were a $4-billion supercollider project, a five-year $ 1.7- 
billion program in computing, a dramatic new “superconductor” 
initiative, contracts for a fabulously expensive space station (the 
announcement called attention to the benefits the project would 
produce for the pharmaceutical and electronic industries), 
“Sematech,” a join venture between the government and high-tech 
companies, as well as other initiatives in robotics, computer-aided 
manufacturing, and materials science. And while the administration 
was taking these little-publicized moves that might someday 
transform the Pentagon into an American equivalent of the famous 
Japanese Ministry of International Trade and Industry (MITI), it 
moved at last to bring the dollar down. 

Here, with Baker at the Treasury, a new and more delicate phase 
of relations with the allies began that leads directly to the policy 
dilemmas Bush now faces. In effect, the administration was seeking 
what might be termed a “kinder, gentler” dollar decline. For this to 
happen, the cooperation of the allies, and particularly of Japan and 
West Germany, was essential. Specifically, if the dollar were to 
decline (thus reducing the imbalance in the U.S. current account), the 
Japanese and Germans would not only have to agree to let their 
export surpluses shrink, but they would also have to expand their 

domestic economies to avoid a decline in total world demand. They 
would, in addition, have to cooperate in guarding the relative 
exchange rates of the major currencies, or there would be massive 
flight from the dollar. 

Neither country was anxious to do any of this. Both had grown 
rich in the postwar period by pursuing strategies of export-led 
growth, and both now feared that an expansion of internal demand 
might well disequilibrate carefully struck balances of power between 
labor and management. 

Baker, however, had several powerful incentives of his own. First, 
in the background there remained always the United States’ trump 
card, its overwhelming comparative advantage in defense. By pushing 
the allies to do more or, sometimes, by upping the ante of what 
“security” required, the United States could exercise real leverage by 
threatening to raise costs on the allies. 

Second, there was Baker’s well-advertised policy of negotiating 
bilateral trade treaties with particular countries. (The most significant 
of these is the recent agreement with Canada, which is shortly to be 
expanded to embrace Mexico.) By suggesting that the U.S. might go 
it alone with a handful of carefully selected partners, these deals 
acted as a check on allied intransigence. 

In the end, however, Baker’s most potent threat proved to be the 
simplest: the United States could simply threaten to let the exchange 
rate drop unilaterally if the allies would not agree to an orderly 
decline. Though in October 1987 this strategy of brinkmanship took 
the world to the edge of the abyss, when Baker and other Treasury 
officials publicly admonished the Germans for provoking an 
upcoming fall in the dollar and crash in the market, in the end it 
worked. After bitter internal debates, Japan expanded internal 
demand substantially, and dismantled a few trade barriers. Germany 
made rather feebler efforts to expand. The dollar continued coming 
down until the summer of 1988, as foreign central banks built up 
massive dollar reserves, in effect subsidizing (as several acute critics 
noted) a vigorous political business cycle for Bush to run on.— 

Animated not only by its growing concern for allied harmony, but 
also by the unyielding pressures of the budget deficit and the plain 
fact that the West Germans would sell to the USSR if the United 
States wouldn’t, the administration abandoned its strident anti-Soviet 
posture. Led by new Commerce Secretary William Verity, food 
companies, capital goods exporters, and several business 

organizations, the administration began to explore avenues for 
increasing trade. It also, of course, negotiated the INF accord and a 
Soviet withdrawal from Afghanistan. 

In electoral terms, there can scarcely be any question that the 
policy package Bush and Baker were gradually fashioning for the vice 
president to run on—peace and prosperity—was highly plausible, 
particularly if one refrained from asking awkward questions about 
the long run. As an early Fortune poll of top executives indicated, 
and the astonishingly high level of contributions revealed in my 
statistical study confirms, their agenda commanded the loyalty of 
most mainline multinationals.— 

But multinationals (and allied financiers) are far from the only 
business groups active in the GOP. Moreover, major veins of 
dissatisfaction exist within the multinational bloc itself, particularly 
in regard to detente. 

As the 1988 campaign approached, ominous signs of dissatisfaction 
began to appear on the right of the GOP. New York Congressman 
Kemp, who during most of President Reagan’s tenure in office had 
usually been counted Bush’s strongest prospective opponent for the 
nomination, stridently denounced the INF Treaty and began running 
furiously against detente and the “sellout” of freedom fighters 
around the globe. 

Donald Rumsfeld, once Gerald Ford’s hawkish secretary of defense 
and then chief executive officer of G. D. Searle, a large 
pharmaceutical concern, began scouting a run, and also looking 
rightwards. So did another card-carrying multinational cold warrior, 
Haig. Pierre DuPont, a one-time moderate Republican governor of 
Delaware, announced his candidacy on a platform that would have 
warmed the heart of the elder Pierre DuPont, who as head of the 
family’s chemical company during the New Deal was one of FDR’s 
sharpest critics. Televangelist Pat Robertson also declared, on a 
platform that on defense and many other topics was well to the right 
of Attila the Hun. And, to the surprise of practically everyone who 
does not closely follow the political economy of the GOP, Kansas 
Senator Robert Dole finally came down well to the right of the Bush 

Not all of these candidates were equally formidable. Kemp, for 
example, was strongly identified as the partisan of supply-side 
economics. In years past, he had also drawn important supporters 

from aerospace and defense enterprises for whom the deficit 
functions first of all as an entry in the profits column, and who 
clearly welcomed Kemp’s insistence that detente was a dangerous 
illusion. But, as earlier observed, the practical meaning of supply-side 
doctrines for the average business was lower interest rates. By early 
1988, however, Baker had been bringing the dollar down for almost 
three years. With exports booming, and the economy beginning to 
bump up against what most business economists reckoned was full 
capacity (whatever the numbers of discouraged workers who no 
longer figured in the unemployment statistics), what was the point of 
a new monetary experiment? And despite the intra-party row over 
detente, the vice president was obviously a plausible standard bearer 
for defense in the fall campaign against the Democrats. 

Not surprisingly, few of the Republican business leaders who had 
in years past been attracted to Kemp’s “exciting new ideas” were still 
excited by them. When Kemp unfurled the banner of aggressive free 
enterprise, salutes came from only a comparative handful of 
deregulation enthusiasts (e.g., Dow Chemical’s Paul Oreffice), 
anointed keepers of the supply-side flame, such as Lewis Lehrman, 
and as table 5.1 indicates, a fair number of PACs or executives from 
savings banks, utilities, and transportation companies, plus the 
handful of real estate contributors probably attracted by the future 
housing and urban development secretary’s emphasis on “enterprise 
zones”. The rest, sometimes after pausing respectfully, moved on.— 

TABLE 5.1. Industry Contributions to Candidates by Party 

Bush (N=436: 69%) 

Oil (.11) 

Computers (.06)* 
Investment Banking (.13) 
Utilities (.13)* 

DuPont (N= 112: 18%) 
Chemicals (.01) 

Commercial Banking (.01)* 
Investment Banking (.01) 

Babbitt (N= 31: 13%) 

Real Estate (.08)* 

Biden (N= 33: 14%) 
Chemicals (.08)* 

Real Estate (.01)* 
Investment Banking (.01) 

Gephardt (N=8 9: 37%) 
Services (.05)* 

Autos (.11)* 

Aircraft (.02)* 

Utilities (.12)* 
MNOC-MIC (.05)* 

Kemp (N= 60: 10%) 
Utilities (.16%)* 
Savings Banks (.16)* 
Transportation (.12)* 
Beverages (.01)* 

Real Estate (.05)* 

Haig (N=13: 2%) 

Aircraft (.01)* 

MNOC-MIC (.07)* 

Real Estate (.15)* 

Gore (N= 93: 38%) 

Utilities (.15)* 

Jackson (N=10: 4%) 
Food/Grain (.01)* 
Commercial Banking (.02)* 

Simon (N=47: 19%) 
Food/Grain (.01)* 
Electronic (.12)* 

Real Estate (.01) 

Dole (N=324: 51%) 
Services (.10) 

Real Estate (.06) 
Insurance (.01) 
Investment Banking (.02) 
Autos (.15) 

Private Hospitals (.15) 
MNOC-MIC (.01) 

Hart (N=18: 7%) 

Investment Banking (.06)* 
Retailers (.03)* 

Dukakis (N=117: 48%) 
Computers (.04)* 
Media/Communication (.06) 
Real Estate (.01) 

Investment Banking (.10) 

Schroeder (N= 3: 1%) 
Media/Communication (.01)* 

Source: Based on FEC data, but including soft money; see text. 

Note: (The universe of comparison is each party’s respective contributors.) Numbers in 
parentheses by each industry are significance levels, not strength. They indicate only positive 
differences from the candidate’s average-industry figures. 

"'Expected value of cell in chi-square less than 5, which is warning that the test has low 

In all probability, DuPont really had his eye on either the vice 
presidency or on 1992 or 1996. However, save for the press (which 
kept hailing his iconoclasm and “courage” in tackling the sacred 
cows of farm subsidies and social security), the family circle (which 
includes a dazzling number of the Forbes 400 wealthiest Americans, 
who, because they are concentrated in one industry, skew table 5.1 ’s 
portrait of the chemical industry), and a surprising number of top 
financiers and bank executives (who, as the people most concerned 
with the future of the dollar in the 1990s, were perhaps making small 
votive offerings in honor of that “courage”), he failed to attract much 

support from business or anyone else. 

Neither did Haig, whose appeal as a right-wing internationalist 
overlapped that of the later Dole or DuPont, but who also had to live 
down a reputation as an unguided missile. (Perhaps appropriately, 
the aircraft industry and a specially defined bloc of superhawks 
discussed below in reference to the Dole campaign backed him at a 
statistically significant level compared to other Republicans.) 
Rumsfeld, after contemplating what it now costs to run for president, 
thriftily called off his effort, as did Nevada Senator Paul Laxalt. 

And Robertson’s campaign, for which the media and many 
scholars had been predicting a heavenly future, staggered under two 
deadly blows. First came the collapse of oil prices, which badly hurt 
some of his major financial backers (such as Bunker Hunt) in the 
sector that had over the years probably invested more in 
fundamentalist politics than any other. The coup de grace to his 
campaign as a serious national threat, as distinct from an annoying 
party presence, came with the disastrous news of apparent devilish 
doings in Charlotte, North Carolina, by Jim and Tammy Bakker, and 
an unorthodox form of witness practiced in Louisiana motels by the 
Reverend Jimmy Swaggart. 

TABLE 5.2. Party and Industry in the 1988 Election (N = 1,380) 

Percentage of total sample contributing to 

at least one Republican 46% 

at least one Democrat 17% 

Industries significantly above the mean in support of Democrats 
Beverages 50%* 

Investment banking 40 %* 

Real estate 39%* 

Computers 32 %f 

Source: Based on FEC data, as in text. 

Note: The universe of comparison is all investors in the sample. 
'-''Statistically significant below .01. 
t Statistically significant below .07. 

That left Dole as the person with the best chance of stopping Bush. 
As all the world knows, he came within a hair of doing precisely that. 
Because of the light it sheds on the potential opposition the Bush 
presidency now faces, it is exceedingly instructive to see how he did 


It is possible that a few people who eventually hopped on the 
bandwagon did so simply because they believed that Dole might run 
a stronger race than Bush, who was then viewed by many in his party 
the way many Democrats now regard Dukakis. Such cases, however, 
should be scattered randomly, and not be concentrated in particular 
sectors, and certainly not in sectors where prominent industrialists 
are openly campaigning for one or the other particular issue. Though 
my data are not perfectly adapted for this task, it is easy to show 
statistically that while Dole and Bush did have partially overlapping 
appeals, Dole very clearly succeeded in tapping sectors (and parts of 
sectors) with a plausible grievance against Bush. 

Dole’s initial campaign impressions, for example, derived mostly 
from the record he had compiled as Senate Republican leader. In that 
role, he had pressed hard on the deficit, much harder than Bush. 
Indeed, as table 5.1 shows, among Republican contributors, Dole’s 
appeal to investment bankers and insurance executives—sellers and 
buyers, respectively, of long-term bonds—stands out compared to 
Bush’s. (For both candidates, statistical tests of significance suggest 
each had above-average support from investment bankers, but the 
results for Dole are much more impressive, whereas the results for 
Bush are borderline.) 

As Dole kicked off his campaign, he was also known as a friend of 
Israel, whereas Bush’s credentials on that score, while scarcely 
negligible, were suspect in some quarters. Dole’s campaign 
contribution list also suggests a certain closeness with the 
commodities markets, and the Kansas senator was in any event a 
hero to large export-oriented farmers. The veteran member of the 
Senate Finance Committee also seems to have attracted support from 
some private hospital chains and parts of the service industry. 

All this, however, provided a rather narrow base. Dole tried 
developing the deficit issue into a call for “burden sharing” by the 
European allies. This would have freed up resources for some 
domestic spending, which Dole pointedly observed had been 
neglected under Reagan. Table 5.1 suggests that some real estate 
magnates either got (or, more likely, sent) the message. But the rest of 
the business community hung back. For all the talk about how the 
compassionate, yet fiscally responsible Dole would make a stronger 
candidate against the Democrats, the plain fact was that Bush’s 
campaign was rolling ahead. 

So, after hesitating almost interminably, Dole made a fateful 
choice. In a complex maneuver, in which he came out for the INF 
Treaty, but positioned himself as a stern critic of the other treaties the 
administration was talking up, he allied with the right and center- 
right opponents of detente. He also spoke out strongly on the 
importance of the American position in the Persian Gulf. 

The result was a political coalition that leaves little trace in my 
regular industry analysis, but which shows up spectacularly when one 
defines a very special universe of comparison: the very largest 
multinational oil companies (all of them among the top twenty 
industrials on the 1987 Fortune list) except Occidental and Chevron 
(which both had major deals in progress with the USSR) plus the 
subset of firms in the aircraft industry whose principal business is 
producing major war-planes and missiles. This “industry” (or better, 
world-historical force), shown in table 5.1 as the MNOC-MIC 
“multinational oil, military-industrial complex” bloc, now swung 
massively for Dole.— As Dole now rushed in on Bush, top executives 
and political action committees from companies such as Lockheed, 
General Dynamics, Northrop, and Rockwell all contributed. Henry 
Kissinger, the living incarnation of prudent multinational skepticism 
about detente, began to confer with him.— And a remarkable number 
of executives from big multinational oil concerns also began 
donating. It is doubtful that oil-policy differences between the 
candidates accounted for this. Bush and Dole did not differ greatly in 
regard to oil policy, though as the race heated up Dole made some 
half-hearted and not particularly convincing noises about an oil tariff 
which many independents, but not most majors, supported. Along 
with gold, however, oil and natural gas are the principal balancing 
items in East-West trade. Many Europeans, indeed, take it for 
granted that the primary limit on how much they can sell the Soviets 
in the short run is how much gas Moscow can sell back to them. 
With oil prices already down, it is unlikely that most major oil 
companies not involved in deals with the Soviets relished the prospect 
of large-scale sales into the West any more than they did in the 1920s 
or 1950s, when this issue spurred major agitation in the industry.— 

Preston Tisch, the brother and close business associate of Lawrence 
Tisch, who had recently acquired CBS, resigned as postmaster 
general, returned to his family’s business interests, and declared for 
Dole.— Then, as the center-right criticism of Bush reached a 

crescendo just ahead of the Iowa primary, Dan Rather, who had 
previously created a stir by briefly slipping into Afghanistan, 
conducted a highly publicized interview with Bush about his role in 
the Iran-Contra affair. 

Though analysts debated who won that exchange, no one disputed 
that Dole defeated Bush in Iowa, or, as Haig, Rumsfeld, and other 
multinational cold warriors came out for Dole, that he seemed on the 
verge of knocking the vice president out of the race. In New 
Hampshire, however, the Bush forces were led by Governor John 
Sununu, who, like Bush himself, was an ardent proponent of nuclear 
power (witness table 5.1 ’s suggestion about the utilities) and the 
licensing of the controversial Seabrook, New Hampshire, nuclear 
plant. Sununu, whose political rise began with the encouragement of 
a lobbyist for Westinghouse, had taken great care to organize the 
state. Aided by enormous infusions of cash, Bush’s campaign eked 
out victory there.— 

As the campaign headed south, Dole then tried a classic maneuver. 
At least three times in the past twenty years, a right-wing candidate 
confronting a strong free-trader has cemented the alliance of the 
center with the right by explicit commitments to textiles and other 
protectionist industrial sectors. Now Dole came out in public for 
protection. Top executives from Bethlehem and USX, the automobile 
industry, some figures from the electronics industry almost certainly 
worried about the Japanese, and prominent textile leaders, including 
Roger Milliken (a prominent advocate of “buy American” policies) 
contributed to his campaign. Dole, like Richard Nixon and Reagan 
before him, struck a formal arrangement with Thurmond, the long¬ 
time champion of the textile industry.— 

Now, however, the devastating long-term effects of the high dollar 
showed. After seven years of imports, and the gradual transformation 
of the Southern industrial structure from a heavy reliance on textiles 
to finance, services, and electronics, the old Southern protectionist 
industrial base was hollowed out. The Bush machine’s multinational 
juggernaut rolled over Dole, effectively destroying his candidacy. 

Bush had won, and turned to face the Democrats. As usual, the 
situation in that party appeared confusing until one analyzed 
competition within the power bloc. 


A flashback to 1984 is a convenient place to begin. In that election, it 
will be recalled (indelibly by many), Walter Mondale ran on a 
program that eschewed many traditional Democratic verities. Instead, 
he promised to raise taxes to close the deficit, and—a bit less clearly 
—uphold “fairness” by trimming the military budget to protect some 
traditional often extensively urban-oriented, social programs. 

Although many in the media and academia subsequently blamed 
the ensuing disaster on Mondale’s capitulation to the “special 
interests” of labor, blacks, and women, these groups were certainly 
not responsible for the disastrous tax pledge or the related rejection 
of bold proposals for tax simplification. Instead, the Democrats’ 
campaign strategy matched the interests of the two major 
components of Mondale’s business bloc. These were investment 
bankers, who as sellers of long-term bonds were in white heat about 
the ballooning deficit, and real estate magnates (mostly in the 
Northeast and Midwest, plus San Francisco and a few other places 
outside the Rust Belt), whose building projects depended on 
continuing federal aid for infrastructure and mass transit. 

Because funds for the cities competed dollar for dollar with 
military spending, the real estate interests genuinely could not afford 
to back conservative Democrats inclined to indulge the defense 
establishment. As a consequence, in 1984 the real estate bloc was 
greatly underrepresented among contributors to conservative 
Democratic presidential candidates and overwhelmingly concentrated 
on relatively “liberal” presidential candidacies. (Many, indeed, had 
earlier helped to finance the antinuclear movement.) These same 
interests, of course, would have lost heavily had tax simplification 
removed the tax code’s special treatment for real estate. (Eventually, 
it did, and they were hit with enormous losses.)— 

A notable advantage the U.S. political system affords large 
investors is that most of the risk accrues to the politicians who take 
the cash rather than to the investors who disburse it. The 1984 
landslide accordingly buried Mondale, but not the investment 
bankers and developers. They remained available, indeed, tirelessly 
active, as tables 5.1 and 5_2 indicate. The task facing Democratic 
presidential aspirants in 1988, therefore, was to find strategies that 
promised to bring these blocs on board while, if possible, broadening 
their appeal. 

In 1987, this did not appear easy, though it was certainly less 
difficult and risky than attempting to run with less money and trying 

to revive the party’s traditional bases of mass support. Investment 
bankers like Roger Altman (previously Carter’s assistant secretary of 
the treasury; in 1984 at Lehman Brothers; and by 1988 a top 
executive of the Blackstone Group, an elite new house organized by 
Peter Peterson, well-known as a critic of the deficit) and Goldman, 
Sachs’ Robert Rubin, who had both flown out to Minnesota to press 
Mondale on the budget, still had deficit reduction as a top priority. 
Increasingly prepared to tolerate limited forms of government 
intervention on behalf of “competitiveness,” such financiers retained 
an abiding interest in free trade and the future flow of investment 
capital from Japan to the United States. Most also retained a deep 
fear of inflation (and thus of monetary ease) while preserving an 
attachment to one legacy of the New Deal: the Glass-Steagall Act, 
which prevents commercial banks from entering investment 
banking. - 

Few of these issues had any mass appeal, however. Accordingly, 
Democratic candidates had little choice but to focus on U.S.-Soviet 
relations or the military budget, if they expected to have anything to 
offer the electorate (and the real estate bloc) at all. 

Here, too, however, would-be candidates faced powerful 
constraints. Although many financiers and other business groups 
sympathized with detente (indeed, a few strong critics of the Reagan 
administration’s Soviet policy, such as IBM’s Thomas J. Watson, had 
supported Mondale in 1984) and were openly organizing to cut the 
military budget, the top priority of most remained deficit reduction 
and, usually, dollar stability. In addition, most members of this bloc 
—in addition to many defense contractors that retained powerful 
positions within the party’s right wing (contributing to such groups 
as the newly organized Democratic Leadership Council [DLC])— 
certainly appreciated the role military force plays in U.S. calculations 
vis-a-vis Japan, the Third World, the Middle East, and Europe, as 
well as the USSR. 

Not surprisingly, more than one prospective candidate 
contemplated the alternatives, and then decided that discretion was 
the better part of valor. New Jersey Senator Bill Bradley, for example, 
was enormously popular on Wall Street. But, as Morgan Stanley’s 
Richard Fisher and other investment bankers talked up his candidacy, 
Bradley backed off. Similarly, Mario Cuomo, advised by a virtual 
Milky Way of international financial stars, including Anthony 
Solomon, Peterson, Felix Rohatyn, and James Robinson, also drew 

back, after what appears to have been a policy clash with at least 
some of the real estate bloc. And Georgia Senator Sam Nunn, a 
champion of military spending, resisted a vast media buildup (in 
which CBS played a prominent role) and prudently took himself out 
of contention. 

As the campaign wore on, other, perhaps less perspicacious, 
candidates probably wished they had emulated the trio of reluctant 
dragons. Even before the monkey business on the Monkey Business , 
for example, it was apparent that Gary Hart’s 1988 campaign— 
which prominently featured a call for an oil import fee—was failing 
to attract much business support outside of the oil-producing states 
(where multimillionaire Texas Lieutenant Governor William Hobby 
had endorsed him, as did several prominent oilmen) and a handful of 
investment bankers ( table 5.1 ) and venture capitalists enthusiastic 
about his detailed and rather far-reaching proposals for combining 
industrial policy with an open world economy.— 

Similarly, former Arizona Governor Bruce Babbitt positioned 
himself as the campaign’s enfant terrible, but to little avail. Reeling 
off a host of ideas that the media kept calling “exciting,” Babbitt 
succeeded in attracting contributions from some very well-placed 
supporters (including David Rockefeller, a leading figure on the 
Trilateral Commission, on which Babbitt himself had served). Table 
5.1 suggests also that he had some appeal to real estate. Although the 
significance level just fails to make the table, it is interesting to note 
that firms in the category I call “media/communications” contributed 
disproportionately to Babbitt. Strikingly, he also benefited from what 
one statistical study of campaign coverage concluded was more 
favorable press coverage than any other candidate received.— But the 
public was less entranced by the value-added tax and other notions 
that Babbitt put forward than was this rather thin slice of big 
business, and Babbitt’s vigorous, frequently very amusing, campaign 
failed to catch fire. By the Iowa primary, Babbitt’s fund-raisers had 
obtained commitments for major new funds, provided that he 
finished at least fourth. When he just barely failed to do so, his 
campaign collapsed. 

The structural dilemmas of how to retain support from both 
investors and voters also destroyed the candidacy of Illinois Senator 
Paul Simon. Announcing himself an unreconstructed New Deal 
Democrat, Simon initially attracted support from leading developers 
—the only segment of the business community (aside, obviously, 

from the very special case of defense) where the notion of federal 
spending was still popular. He also got some support from concerns 
in the food and grain business—where advocates of friendlier 
relations with the USSR have often found friends in recent years.— 
To this base, he added many American friends of Israel, Jews and 
Gentiles alike. (Simon was co-sponsor of a resolution to expel the 
United Nations office of the Palestine Liberation Organization from 
the United States.) 

It is interesting to speculate what might have happened had Simon 
persevered in his support of the New Deal and economic equity. 
Possibly, his candidacy might have taken off like Jackson’s. But he 
did not. Although polls show that more than three-fifths of the public 
favor a federal job guarantee, and the balanced budget multiplier is a 
standard result in orthodox economic theory, the media and more 
conservative Democrats ridiculed Simon’s program for full 
employment. Virtually questioning his intelligence, they patronized 
him, and frequently implied that the program would fatally swell the 
deficit. — Instead of striking back vigorously, Simon elected to keep 
raising money from essentially conservative real estate magnates like 
Donald Trump, from the Chicago commodities exchanges, and from 
similar sources. He toned down his campaign, running mainly on 
symbols like the bow tie. Probably only a fraction of the population 
figured out what he stood for before his candicacy ran out of money. 

By then, however, Missouri Congressman Richard Gephardt was 
on center stage and alarm bells were ringing from New York to 
Tokyo. A founder of the conservative DLC who had voted for the 
1981 tax cuts and championed military spending, Gephardt 
originally appeared to be just another member of the growing bloc of 
“neoliberal” congressmen who wanted to move the party to the right. 

The high dollar, however, devastated agriculture and much of 
industry in middle America. After the collapse of oil prices in the late 
winter of 1985-1986, many congressional Democrats whose districts 
were not sharing in the relative prosperity of what many were then 
referring to as the “bicoastal economy” began casting about for a 
program. Stimulated at least in part by Jim Wright, the new House 
speaker, whose Texas district faced severe economic dislocation, this 
group gradually began to evolve a program. 

This program had three main planks. The first was a plan for 
cartelizing farm prices. Trumpeted as a means of saving the family 
farm, the program in fact had broader objectives. By guaranteeing 

product prices, it would halt the erosion of real estate prices and 
provide more income for distressed farm regions. This, in turn, would 
stabilize conditions for lenders in the region, many of which were 
facing bankruptcy. 

A second part of the program was a tariff on imported oil, which 
would accomplish for the oil patch what the farm program would do 
for the farm states. 

The third part of the program was the famous “Gephardt 
amendment,” added by Wright and Gephardt to the pending trade 
bill. The amendment required countries, such as Japan and Korea, 
which consistently export more goods to the United States than they 
buy from it, to reduce those trade surpluses by 10 percent per year, 
or their goods would be subject to new penalty duties designed to 
force the adjustment. 

From the moment it was introduced, the measure was a lightning 
rod for free-traders, who insisted that it represented a modern version 
of the notorious Smoot-Hawley tariff and a capitulation by the 
Democrats to the AFL-CIO. 

The latter charge, at least, was simply not true. The bill was in fact 
a shrewdly designed measure to attract back to the Democrats a part 
of the business community that seemed, in 1986-1987, to be 
potentially movable. Part of a series of other congressional 
Democratic initiatives that included a major report on the status of 
American high-tech industries and studies highlighting what was said 
to be a growing disparity of incomes within the workforce, the 
amendment appears actually to have been promoted by lobbyists for 
companies that were worried about the Japanese challenge, such as 
Motorola, or that wanted to force open the Japanese market, such as 
Monsanto (located in the same city as Gephardt’s district, it donated 
a set of silicon wafers to Gephardt for distribution to House members 
as an attention-getting device in the days before the vote). Obviously, 
some protectionists did support the bill: Lee Iacocca was certainly not 
hoping to pry open the Korean market to $48,000 Chryslers when 
that corporation came out for the bill, nor were the United Auto 

Exceptionally well conceived in its early stages, the movement to 
make Gephardt president got under way early. Long before he 
declared his candidacy, many businesses—especially agricultural 
creditors, including a striking number of insurance companies, along 
with various manufacturers—had contributed to his PAC. Then the 

congressman distributed the money to his colleagues running for 
reelection in 1986 and after. When Gephardt finally declared, an 
impressive phalanx of his House colleagues then turned around and 
endorsed him. 

The campaign itself also raised considerable money from 
manufacturing concerns that had not recently—or, probably, ever, in 
some cases—aided a Democratic presidential candidate. Monsanto, 
Ralston-Purina, NCR, and other companies (or their executives) 
contributed. It is interesting to note that although Gephardt did 
comparatively little talking about military spending, he was the only 
Democrat who attracted any significant support from the defense 
industry (see the entry in table 5.1 for “aircraft”). A number of 
prominent auto industry figures contributed, including not only 
executives from General Motors but Iacocca himself. In a nice 
regional touch, Detroit Edison executives also contributed. 

Save for a handful of concerns that hoped to use the bill as a wedge 
to open up Japan, however, the multinational community was 
terrified by Gephardt’s trade policy. Not surprisingly, according to 
statistical studies of the campaign, the most multinational of all 
American industries, the prestige media, flayed Gephardt.— 

Blasted by the press and cut off because of his support for trade 
restriction from most major sources of funds, Gephardt radicalized 
his appeal. He began carrying around a copy of a book highly critical 
of the Federal Reserve’s relations with large banks, William Greider’s 
Secrets of The Temple , and he started to denounce an unfeeling 

Popular response to his campaign was phenomenal. But perhaps 
because of the blurred image he had on defense issues, he was not 
able to break through to one big constituency in particular that 
perhaps might have shared his new interest in “populism”—real 
estate—and he faced increasing difficulty raising money.— When the 
campaign turned South and for the first time faced an expensive 
multistate media buy-out, it began to disintegrate. For a while it 
coped by aggressively soliciting from corporate lobbyists. But it 
simply could not find the funds to compete all over the South. 

Tennessee Senator Albert Gore had earlier entered the race upon 
the entreaties of (mostly Northern) businessmen who had previously 
failed to persuade Arkansas Senator Dale Bumpers to take the 
plunge. Subsequently Gore had allied himself with the champions of 
military spending and the Fikud party’s interpretation of Israeli 

security. Although hyped by much of the media as a uniquely 
Southern candidate, in fact the former liberal’s conservative volte- 
face and alliance with local machines and utilities ( table 5.1 ) did not 
sit well in his own region. 

With polls taken shortly before “Super Tuesday” raising the 
possibility that the only Southern feature of his campaign might be 
that it would soon be gone with the wind, Gore did not stand on 
principle. Making timely use of Yankee lucre, he was born again at 
the last minute as a populist a la Gephardt. Connoisseurs who 
treasure the memory of H. L. Mencken will regret that no polling 
agency thought to ask how many Southern voters in fact thought 
they were voting for the elder Gore, a famous New Deal senator who 
now graced the board of Occidental Petroleum, but the switch in the 
nick of time saved Gore, and it almost certainly helped put Gephardt 
out of the race.— 

Either because it was almost uniquely short-sighted or, perhaps, 
always represented less a real campaign than a device for tying up the 
convention for someone else’s benefit, the Gore campaign had never 
bothered to organize most areas outside the South. As a consequence, 
aside from New York state, where his campaign famously allied itself 
with Mayor Edward Koch, Gore swiftly disappeared as a factor in 
the race, turning the campaign into a two-man contest between 
Jackson and Dukakis. 

One could analyze this, the most dramatic part of the campaign 
forever—but from the standpoint of political economy, the broad 
pattern is cut and dried. In 1984, Jackson’s campaign received minor 
assistance from a few American multinationals that do business in the 
Third World, and which have historically cultivated ties with parts of 
the African-American community. (Atlanta-based Coca-Cola is 
perhaps the outstanding example.) It also received some aid from 
some multinationally oriented foundation personnel (e.g., David 
Rockefeller Jr.), some prominent Americans who have long 
advocated a change in U.S. policy toward the Middle East (e.g., 
former U.S. ambassador to Saudi Arabia James Akins), and many 
African-American business figures. - 

As important as this support undoubtedly was, however, the plain 
fact is that it did not add up to much. Even if one reckons in the 
controversial grants to Operation Push from the Arab League, 
Jackson’s 1984 campaign was far underfunded by comparison with 
that of virtually every other major candidate. 

The same was true of the 1988 campaign, particularly in its crucial 
early stages. Here, again, it is clear that some money arrived from 
Arab-Amerians and others concerned with changing American policy 
toward the Middle East,— as well as from two distinguishably 
different African-American business groups: professionals who have 
risen to responsible positions within American big business, and 
entrepreneurs, whose companies tend to be much smaller. But in 
1988, support from foundations or major corporations appears to 
have amounted to even less than in 1984. The campaign’s 
organizational base was essentially elsewhere—in what remains of 
the civil rights movement, and part of organized labor. - 

Later, the Jackson campaign clearly did receive some support from 
parts of Wall Street (where there is considerable sympathy for 
Jackson’s plea for more attention to the Third World, if not for other 
parts of his message, and where there is some evidence that his 
relative silence on the role of the Federal Reserve and high interest 
rates was noted). That part of the American establishment that favors 
a shift in American policy toward the Middle East also, at least 
intermittently, talked up Jackson’s role in the party—once it was 
clear that he could not be nominated. 

Virtually everyone else in the party, however, quickly closed ranks 
against Jackson, in favor of his remaining opponent: Dukakis. 

This was no accident of circumstance. Standing originally in the 
shadows of Bradley, Cuomo, and Senator Joseph Biden, Dukakis 
shared their appeal to investment bankers worried about free trade 
and budget deficits. In due course, many of the leading Democratic 
stars of Wall Street began contributing: Not only Rubin and Altman, 
but also John Gutfreund, chair of Salomon Brothers, and Rohatyn, 
among many others. As supporters befitting a candidate who took 
public transit to work every morning, many real estate developers 
also pitched in, including several members of the Dunfey family who 
had prominently backed the early antinuclear movement, and Alan 
Leventhal. (Compare, in table 5.1 , the striking similarities between 
Biden and Dukakis in their overlapping appeals to both investment 
banking and real estate, if not the chemicals industry—Dukakis was 
not, after all, a senator from Delaware.) 

To this base (and the Greek entrepreneurs beloved of so many 
newspaper “analyses” of the Dukakis campaign) reminiscent of 
Mondale, however, Dukakis quickly began adding other sectors. In 
sharp contrast to Mondale, who by no means succeeded in unifying 

the Minneapolis business community around him in 1984, Dukakis 
won support from many of the most influential concerns in the 
Boston area, including the fabled “Vault” of major banks and most 
of the Massachusetts High Tech Council. 

Indeed, his campaign strongly attracted high tech and computer 
firms.— Hale & Dorr attorney Paul Brountas, who conducted the 
vice presidential search for Dukakis and is usually numbered among 
his closest friends, is widely recognized as a leading specialist in high- 
tech law, and has long been close to the leadership of the High Tech 
Council, as well as to many of its individual firms, such as Analog 

Promoting the kind of (limited) business-government-academe 
partnership that these threatened sectors now find so attractive, 
Dukakis’s fund-raisers ranged over the entire country. Aided by the 
head of Prime Computer and others, the campaign made early 
inroads into California’s Silicon Valley. There, Regis McKenna, a 
leading public relations consultant to the industry, who in 1984 had 
aided the Hart campaign, became an early donor. 

Uniquely among the white candidates, Dukakis also began a major 
campaign around health issues. Although one is not used to thinking 
of this sector as part of the high-technology economy, in fact medical 
instrument companies, research hospitals, and biotechnology 
concerns are as much a part of high tech as any defense contractor. 
Dukakis’s best-known initiative on this front, a bill to phase in 
universal health insurance in Massachusetts, was attacked by doctors 
but supported by other parts of the health industry, including 
hospitals after they were released from most cost controls. Other 
supporters of the bill hailed it as part of a long-term effort to shore 
up the state’s position in the increasingly hot competition for world 
leadership in biotech industries. 

Throughout his campaign, Dukakis periodically called for a 
national version of the Massachusetts plan. While this figured to 
attract voters, for whom a long stay in the hospital often means 
bankruptcy, it also had plenty of powerful, well-funded business 
support. Even a cursory glance at FEC records of Dukakis’s swelling 
campaign chest shows an outpouring of donations from at least some 
personnel in parts of the insurance industry,— notably Blue Cross 
companies from around the country. Dukakis himself owned a small 
amount of stock in a company controlled by a high-tech industrialist 
whose foundation has made major efforts to place health care on the 

national agenda. 

The campaign’s efforts to tap parts of what might be termed the 
“medical-industrial complex,” however, along with its commitments 
to housing and mass transit (if not, perhaps, to “cities” on the scale 
of the old federal programs) greatly narrowed its room for maneuver 
in regard to the issues and sectors that often make or break 
presidential campaigns: defense and military spending. 

Not surprisingly, Dukakis moved very cautiously in this area. Early 
in the campaign, precisely as one would expect from a candidate with 
his business base, he appeared skeptical of military spending. Not 
only did he sharply criticize aid to the Contras, but he also came out 
against additional testing of virtually all new strategic weapons 
systems. He also attacked “Star Wars” and opposed both the 
proposed single-warhead Midgetman missile and the Reagan 
administration’s own version of mass transit—the famous, and 
fabulously expensive, scheme to base the MX missile on underground 
railway cars. No less predictably, representatives of the defense 
(aircraft) industry in my sample refrained disproportionately from 
contributing to Dukakis’s campaign. 

In the latter stages of the race, this led to heavy criticism from the 
party’s right wing, as well as some scarcely veiled hints in the Wall 
Street Journal and elsewhere that Dukakis consider the virtues of 
emulating Kennedy’s 1960 campaign (which famously highlighted a 
bogus missile gap) and tack to his right, perhaps by selecting Nunn as 
his running mate. 

In a series of slow steps, the Dukakis campaign proceeded to do 
precisely this. Coming out flatly against Jackson’s demand for major 
cuts in defense spending, Dukakis announced his determination to 
hold defense spending steady in real terms over the next few years—a 
position that distinguished him from the hard right, but which was in 
fact rather close to the position Defense Secretary Frank Carlucci 
pursued after taking over from Caspar Weinberger. In a critical signal 
of his intentions on military spending, Dukakis ruled out fast-track 
arms negotiations with USSR President Mikhail Gorbachev—a 
position that was then being embraced by a wide range of 
establishment figures, from Cyrus Vance to Kissinger, and which 
briefly plunged German-American relations into crisis after the 
election. In negotiations over the Democratic platform, Dukakis also 
surprised the Jackson forces by backing off his earlier positions 
against the Contras. He also strongly opposed Jackson’s resolution 

on the Middle East, which, along with Dukakis’s declaration that the 
United States should recognize Jerusalem as the capital of Israel and 
assiduous work by several members of his finance committee, helped 
bring over to him many supporters of Gore. 

In a major speech to the Atlantic Council, Dukakis also vigorously 
promoted a new conventional defense initiative—and “conventional” 
here meant “high tech,” since no U.S. defense planner contemplated 
trying to go one-on-one with Soviet forces. Perhaps not surprisingly, 
Raytheon, the giant, Boston-based defense contractor whose chief 
contributed to the campaign, later told the Boston Globe that it 
expected few problems if Dukakis were elected, while other 
electronics industry spokespersons in New England openly predicted 
that the stress on conventional weapons would lead to new 

And of course, Dukakis eventually selected as his running mate 
Texas Senator Lloyd Bentsen, champion of a bristling national 
defense, the Contras, oil import levies, the 1981 tax bill, the MX, and 
the B-l, and a representative of a state whose business elite has been 
selfconsciously modernizing around high tech and biotechnology. 
Because Bentsen could hardly fail to look good next to Dan Quayle, 
his selection as vice presidential candidate was never really 
scrutinized, nor did many connect the choice to the disastrously 
muted tone of the Democratic campaign. Nevertheless, as the cleanup 
began from the bash at the Democratic Convention celebrating the 
historic Boston-Austin axis cosponsored by America’s largest natural 
gas pipeline concern, it was already clear that the candidate would 
have nothing to say to the electorate in the fall. Like Carter and 
Mondale before him, admission to the real party was by invitation 
only—and invitations were only going to major donors; voters 
needed not apply. 

Not surprisingly, the electorate was less than entranced. The 
Dukakis campaign had already puzzled and angered many of its 
supporters within the Democratic party by its insulting treatment of 
Jackson, its coolness to organized labor, and its repeatedly expressed 
disdain for traditional Democratic verities. Now to almost everyone’s 
surprise, the Massachusetts governor declined to counterattack when 
challenged by the GOP. Day after bewildering day, neither he nor 
anyone else in the entourage had anything to say. Flinching at the 
very mention of what rapidly became known as the “L-word” 
(“liberal”), the campaign disdained to defend its standard bearer’s 

patriotism, and backed away from an earlier commitment to Jackson 
to vigorously register new voters. 

While top campaign officials warned about the dangers of 
pandering to electoral passions that might win votes, the governor’s 
camp turned a deaf ear to widespread pleas to spotlight economic 
issues of concern to average voters, such as international trade or 
mounting evidence of growing disparities in income. Instead, until a 
fortnight before the election, the candidate and the party held firmly 
to Aesopian rhetoric about “values” and “competence.” The 
eleventh-hour rediscovery of the New Deal sent the Massachusetts 
governor’s poll ratings up smartly, but by then it was too late. 
Whereas in the spring, people who believed the economy would 
remain “about the same” mostly preferred Dukakis to Bush, by 
November the reverse was true—even though only a third of this 
pivotal middle group asserted they were voting to continue the 
Reagan legacy. (Those who had managed to persuade themselves that 
the economy would be better were voting overwhelming Republican; 
those who believed the economy would be worse, Democratic.) 
Dukakis lost, as voter turnout in many regions of the country fell to 
levels not witnessed since the 1820s, when property suffrage 
restrictions were in force.— 


Early versions of this paper were presented to the Seminar on 
International Political Economy of the University of Chicago, the 
Johns Hopkins University’s School of Advanced International Studies 
at Bologna, and also at Bard College, Hobart and William Smith 
Colleges, Colgate University, New York University, Bentley College, 
the Boyden Seminar of the University of Massachusetts, Boston, a 
plenary session at the 1989 Annual Meeting of the Midwest Political 
Science Association, and several conferences in Bonn and West Berlin 
organized by the Friedrich Ebert Stiftung. I am grateful to a number 
of the participants in these sessions for helpful comments. It is also a 
pleasure to acknowledge special debts to Stanley Kelley, John Geer, 
Walter Dean Burnham, Ben Page, Rick Pullen, and Paul Perry, for 
data or other assistance; to Erik Devereux, John Havens, and 
particularly Goresh Hosangady for advice on statistical methods; and 
to Bruce Cumings, James Kurth, Robert Johnson, David Hale, Alain 
Parguez, Joel Rogers, and Sherle Schwendiger for many discussions. 


‘Real Change’? f Organized Capitalism,’ Fiscal 
Policy, and the 1992 Election 

THROUGHOUT 1992’S marathon race to the White House, 
candidate Bill Clinton and his surrogates kept chanting one word like 
a mantra: “change.” The morning after the election, however, signals 
switched dramatically. Suddenly the president-elect and his 
spokespersons began warning that bringing about real change would 
be a long and difficult process. 

Soon the people who had won the election by focusing single- 
mindedly on “the economy, stupid,” abruptly changed the subject— 
to the issue of gays in the military. After a few days, they dropped it 
like a hot potato. Over the next few weeks, the bond market rallied 
euphorically, while the man who promised that his cabinet would 
“look like America” announced an economic team that looked like 
Wall Street, a foreign-policy team that resembled Jimmy Carter’s, and 
a raft of other appointments that looked, if not exactly like the 
Business Council (still a white male bastion), then perhaps the 
affluent clientele of some exclusive spa or ski resort. 

Nor was this all. Only days after the election two major unions, 
the United Auto Workers (UAW) and the American Federation of 
State, County, and Municipal Employees, pulled the rug out from 
under the coalition for Canadian-style (“single payer”) health 
insurance—a step that both common sense and well-connected 
insiders indicated was related to the ascent of the new chief 
executive .- 

At the celebrated two-day economic summit in Little Rock in 
December 1992, more strange new signals started flashing. Clinton 
advisers encouraged John White, who originally had put together 
Ross Perot’s deficit plan before defecting to the Arkansas governor, 
to repackage data that they had possessed for months to emphasize 
the impression that the deficit was growing faster than anyone 
suspected. Shortly afterward Clinton, who all through the campaign 
had pilloried Perot for targeting the deficit instead of economic 
growth, told the Wall Street Journal that reducing the deficit now 
had to be his top priority.- 

In the midst of this dramatic about-face came another less heralded 
but very revealing vignette. In Little Rock, Massachusetts Institute of 
Technology economist Rudiger Dornbusch (and others) urged a 
quick devaluation of the dollar against both the Japanese yen and the 
other dollar-linked Asian economies that have year after year racked 
up enormous trade surpluses against the United States. The 
presidentelect himself responded by declaring that “I’m for a strong 
dollar,” while Robert Rubin, the Goldman, Sachs executive whom 
Clinton named to head his newly created National Economic 
Council, worried out loud about “business confidence and long-term 
bond yields.” Immediately after the conference, Clinton aides put out 
word to the press that Fred Bergsten, an economist widely thought to 
be sympathetic to a lower dollar, had damaged his standing with the 
new administration by his comments in Little Rock. Subsequent press 
reports also indicated that doubts about the commitment of other 
potential candidates to a high dollar had played a role in the decision 
to appoint Harvard economics professor (and World Bank President) 
Lawrence Summers to the bellwether post of undersecretary of the 
treasury for international affairs.- 


In mid-February 1993, after an embarrassing series of missteps over 
appointments and the question of gays in the military, the president 
at last unveiled his economic plan. Addressing a joint session of 
Congress and a nationwide TV audience, the president boldly 
repudiated the Reaganomics of his immediate predecessors. He called 
for higher income taxes on the very wealthiest Americans and a rise 
in the corporate tax rate. He also proposed a new, broad-based tax 
on energy that would be phased in over several years. In the next 
breath, the president put forward a series of sweeping new spending 
initiatives (including tax credits) totalling some $169 billion by 1997, 
while proposing cuts of $247 billion over the same period. Taken as 
a whole, his package aimed to reduce the deficit—then running at 
about $319 billion a year and projected to rise, if nothing were done, 
to about $346 billion by 1997—to about $200 billion per year 
(approximately 3 percent of GNP) in the last year of his first term, 
though the White House emphasized that continued progress on 
deficit reduction would also depend on passage of the president’s 
forthcoming health-care plan.- 

Although the earliest polls suggested that the public’s initial 
reaction to the speech was favorable, within days the administration’s 
splendid new coach began turning into a pumpkin. From the start the 
media highlighted complaints by wealthy Americans about the 
proposed increases in taxes in the very highest brackets. Over time 
this line of criticism hardened into a cliche: Republicans, conservative 
Democrats, Perot, and many business groups accused the 
administration of underestimating how much the president’s plan 
would cost average Americans. Spending, they argued, should be cut 
by far more than the president proposed. 

One disaster after another began piling up for the administration. 
Even though the economy was creeping along at a snail’s pace and 
polls indicated that jobs rather than the deficit were by far the 
public’s top priority, the Senate brusquely rejected the President’s 
request for a tiny fiscal stimulus program (initially some $30 billion, 
later reduced to $16 billion). 1 Insurance companies, doctors, 
pharmaceutical concerns and the rest of the medical-industrial 
complex besieged task forces drafting the health-care proposals. The 
administration also became bogged down in battles with Congress 
and the Pentagon over the question of gays in the military; debates 
over intervention in Somalia, the Balkans and Haiti; and conflicts 
over taxes (especially energy taxes) and appointments. 

Amid growing popular concern about the “jobless recovery,” the 
president began sliding in the polls. In March, the president’s 
approval ratings, according to a CBS/New York Times poll, stood at 
55 percent. Two months later, his approval rating was around 40 
percent and falling. Comparisons of Clinton to Carter and talk of a 
possible one-term presidency started seeping into the major media. At 
the end of May, a desperate White House responded dramatically by 
naming David Gergen, White House director of communications 
under Ronald Reagan, and a major architect of the policies Clinton 
was pledged to reverse, counselor to the President.- 

Though the president’s poll rating did not move a jot, the media 
showered praise on Gergen. Amid a blizzard of exuberant press 
notices hailing the president’s return to the “middle of the road,” the 
wrenching sense of imminent collapse faded. At the price of 
additional spending cuts and a wholesale retreat on energy taxes, the 
White House secured passage of its deficit plan. It also began scaling 
back its highly touted plan for overhauling the nation’s health-care 
delivery system, and started gearing up to pass the North American 

Free Trade Agreement (NAFTA). 

In a society already filled with foreboding about the future, these 
moves triggered a riot of speculation and criticism. But while the 
torrent of commentary undoubtedly heightened many Americans’ 
sense of desperation, it did little to clarify what all the shouting was 
really about. 

In public, everything appeared very simple, at least until Gergen’s 
appointment. As William Kristol and many other Republicans 
charged, the rise in income taxes in the highest brackets and the 
increase in corporation tax rates suggested an abrupt declaration of 
“class war.” The Democrats, it seemed, must be returning to their 
New Deal roots, reclaiming a heritage everyone thought they had 
abandoned. From this perspective, the new spending programs 
outlined by the president were entirely predictable: more tax and 
spend, spend and tax. 

But as so often in American politics, appearance and reality 
diverge. From the standpoint of social equity, it can scarcely be 
doubted that the initial version of the Clinton fiscal program differed 
drastically from anything ever contemplated by Presidents Reagan 
and George Bush. 

Still, the notion that even the original plan amounted to class war 
is absurd on its face. Sometimes one picture is worth a thousand 
words. Such, perhaps, was the case with the television shots of 
Federal Reserve Chair Alan Greenspan and Apple Computer CEO 
John Sculley sitting next to Hillary Rodham Clinton during the 
president’s speech to Congress. Nor can one easily imagine Lloyd 
Bentsen, Rubin, or Roger Altman in the role of Lenin or Trotsky; or 
forget the millions of dollars in soft money that flowed to the 
Democrats in 1992 (not to mention the almost frivolous “plan” put 
forward by the president to curb the influence of lobbyists and 
political money in the same speech).- 

As the introduction to this book observed, the administration’s 
flamboyant, “hot button” appeals to particular liberal constituencies 
in its first months—the appointment of Robert Reich to head the 
transition team, the nominations of several liberals to second-tier 
positions in various government agencies (none were offered a major 
position), the highly publicized search for the perfect “politically 
correct” cabinet—were really quite misleading. Not only every top- 
level appointment in the areas of economics, foreign policy, and 
defense, but the whole trend of the new regime’s macroeconomic 

policies ran in thoroughly center-right directions, to the extent that 
the administration made a special point of calling attention to how 
closely some of its budget proposals resembled Perot’s. 

In addition, even the original budget plan (to say nothing of the far 
more conservative bill that finally passed) was relatively modest. For 
all the wailing in the upper brackets, the increase in tax rates initially 
requested scarcely added up to a reversal of Reaganomics: All of 5 
percentage points for households with incomes of $180,000 or more, 
with an additional surtax of 10 percent on incomes over $250,000 
(adding, perhaps, 3 more percentage points to the effective tax rate 
on this most affluent of groups). Familiar tax shelters, including the 
exemption for interest earned on tax-free government bonds, escaped 
untouched. The rise in the corporate tax rate initially requested (and 
eventually enacted) amounted to exactly 2 percentage points. And a 
substantial share of the new spending proposed was earmarked for 
business, including various tax credits and a wide variety of new 
subsidies, sometimes masked by such labels as “defense conversion” 
or “research. 

To say this is not to condemn the program—I have already 
indicated that from an equity perspective, it is probably the best we 
are likely to see. But it is to warn, urgently, that much more is going 
on here than anyone has suggested in public. 

And, alas, it is to raise another yellow caution flag as well. In 
replacing the campaign’s emphasis on spurring economic growth 
with Perot’s focus on the deficit once the election was over, the 
president appears to have fatally compromised the whole effort. 

Asked to choose between reducing the deficit and spurring 
economic growth, Americans overwhelmingly indicate to pollsters 
that their priority is growth. If, as the polls also indicate, many 
average Americans were also willing to indulge the president’s new 
concentration on the deficit, it is surely because most were persuaded 
that eliminating the deficit would guarantee a return to rapid 
economic growth. 

But they are almost surely mistaken, as is discussed in more detail 
in the latter parts of this essay. One symptom of the problem is the 
anemic $30 billion in new spending initially proposed by the 
president to stimulate the economy. As Robert Eisner, Paul Davidson, 
and others have pointed out, in a trillion-dollar economy the amount 
is derisory. Yet the administration abandoned the whole effort at the 
first sign of trouble, without any effort to explain to the public what 

the real stakes were.- 

In the context of the administration’s commitment to a high dollar 
(save against the yen), the result is likely to be real trouble a year or 
so down the road. In the presidential campaign, candidate Clinton 
repeatedly objected that Perot’s “cold turkey” approach to cutting 
the deficit would strangle the economy by fatally constricting total 
demand. Perot, however, did have a partial answer. The economic 
simulations that were run to check out his plan’s overall impact 
assumed a substantial devaluation of the dollar. By raising exports as 
government spending contracted, this would have partially 
compensated for the fall in total demand.— 

Now, however, the Clinton administration has taken over much of 
Perot’s deficit plan, but not his devaluation. (It has pressured the 
Japanese to revalue the yen, but, as is discussed below, this step poses 
major political risks to the ruling political coalition in Japan, since it 
implies a sharp break with the Japanese economy’s traditional 
orientation toward exports rather than domestic consumption. It also 
bypasses the equally compelling problem of the smaller Asian 
“tigers”, which have year after year piled up enormous trading 
surpluses against the United States.) As a result, the administration’s 
economic plan rests almost entirely on optimistic hopes that deficit 
reduction will quickly and durably bring down long-term rates of 
interest as the Fed cooperates and investors shed their fears of 

Despite the Dionysian revels accompanying the bond-market rally 
that began soon after the new president defined his course, this is 
unlikely. Not that interest rates will not come down—for a while. Or 
that spending for capital investment will not respond—at least to the 
extent of triggering yet another wave of “America is back” flag- 
waving. But in the longer run, as exports fail to rise enough to offset 
the reductions in aggregate demand occasioned by a shrinking budget 
deficit, the resulting rates of growth are likely to be disappointing. 

This will not, however, be the only serious consequence of the 
administration’s decision to court financial markets so ostentatiously. 
In the 1990s, alas, those who live by financial markets are all too 
likely to die from them. A consistent focus on retaining Wall Street’s 
confidence will require the president to concede the Federal Reserve 
extensive freedom over interest-rate policy. Given the virtual 
paranoia about inflation that now dominates world financial 
markets, the result is predictable: At the first sign of a recovery, the 

Fed will move to choke off “inflation” by raising short-term interest 

The clamor for a rise in interest rates will be all the stronger if, as 
is likely in the early stages of even the Clinton program, the U.S. rate 
of economic growth runs ahead of that of most of its trading 
partners. Imports into the United States will then be rising faster than 
American exports. This will swell the already huge U.S. current 
account deficit with the rest of the world, and put downward 
pressure on the international value of the dollar. Just as in the Carter 
years, financial markets are certain to respond by calling for higher 
rates, both to make dollars more attractive to hold and also to reduce 
imports by slowing the economy’s rate of growth. The trade deficit 
would then slowly shrink, simply as a result of the United States 
growing less rapidly than other parts of the world. 

Such policy packages are precisely what the millions of Americans 
who elected Clinton voted against , and what they believed they were 
avoiding by supporting his plan to reduce the deficit. It is not difficult 
to imagine their reactions as they discover, over the next several 
years, that they were wrong. As the now well-documented squeeze 
tightens on their wages, pensions, and medical benefits, dashing their 
hopes for recovering the “American dream,” these voters’ sense of 
desperation is likely to increase.— Particularly if they become 
convinced that the “liberal” or “left” alternative has demonstrably 
failed, many such people are likely to explore drastic alternatives: 
One or the other Republican supply-sider, Perot, or perhaps someone 
still in the shadows—anyone who can plausibly embody fading ideals 
of economic growth and American preeminence (while raising the 
millions of dollars required to run). 

Such thoughts may remind us that while Hollywood has easy 
access to the Clinton White House, a happy ending to the current 
imbroglio is not guaranteed. But what, therefore, ever impelled the 
president to become a born-again deficit hawk in the first place? 
Could this belated metamorphosis have been predicted by a careful 
observer of the 1992 campaign? Why, with unemployment so high, 
was the proposed economic stimulus so feeble? What about the quite 
sizable investment component of the administration’s program and 
its widely touted initiatives in favor of various businesses? And why 
is the administration so concerned with the level of the dollar and the 
bond market? 

In an age when even major media figures decry the replacement of 

news by entertainment, there is little to be gained by rounding up and 
interrogating yet again the usual suspects from the press or the 
academy. Instead the task is to put the investment approach to party 
competition, outlined earlier in this book, to work on what are rather 
obviously the three main questions about the 1992 election: First, 
how did Bush, who appeared invincible throughout virtually all of 
1991, ever contrive to lose? Above all, why didn’t he stimulate the 
economy, as virtually everyone expected? Second, what enabled 
Clinton to outlast all the other entrants in the crowded Democratic 
field, so that he rather than someone else became the all but 
inevitable alternative to a regime that vast numbers of Americans 
were coming to detest? Third, why did Perot, the 1992 campaign’s 
unidentified flying object (and walking incarnation of the investment 
theory of political parties), really break with the Republican Party 
and what did he (does he) really stand for? 


During most of 1991, Bush seemed destined for a reelection triumph 
of overwhelming—indeed, historic—proportions. Amid the world- 
shattering upheavals of his first term—the fall of the Berlin Wall and 
the reunification of Germany; the collapse of Communism, first in 
Eastern Europe and then, shockingly, in the USSR itself; Iraq’s 
invasion of Kuwait and the Gulf War—the man whom opponents 
formerly derided as a wimp now appeared to most Americans like 
Shakespeare’s Julius Caesar, someone who “doth bestride the narrow 
world like a colossus.” At times his Gallup ratings were the highest 
ever recorded for any president, higher than Dwight D. Eisenhower’s, 
above John F. Kennedy’s, even briefly surpassing Franklin D. 
Roosevelt’s. As the joke went round that in 1992 the Democrats were 
planning to nominate Bush for president and Bentsen for vice 
president, many of the strongest potential Democratic candidates 
drew back from even making the race.— 

Now, of course, the irony is almost vertiginous. But there is more 
than irony: there is an abiding puzzle. If any proposition commanded 
universal assent from commentators on all shades of the political 
spectrum as the 1992 election approached, it was that Republican 
strategists lucidly understood the importance of the political business 
cycle to getting reelected; and that in 1992 they would, as they had in 
1984 and 1988, make sure that the economy was headed firmly up. 

In the end, however, Bush compiled the worst economic record of 
any president since the end of World War II. The economic upturn 
that finally materialized was anemic by comparison with past cyclical 
recoveries. Indeed, down to the very eve of the election, it was all but 
invisible to the naked eye. For the first time since Carter, arguments 
that the United States economy faced structural crisis and secular 
decline became plausible to the average man and woman in— 
sometimes literally—the street. 

On election night, with exit polls showing that the economy far 
outpaced all other issues as a factor in voters’ decisions, virtually 
everyone could agree that the election was less a triumph for Clinton 
than a stunning repudiation of Bush.^ But no very satisfying answer 
emerged as to why the president’s economic record was so uniquely 

Perhaps the most commonly expressed view was that somehow 
“George Bush just didn’t get it,” that he had spent too much time in 
Washington isolated from voters and real life. More economically 
sophisticated analysts tried to account for the bungled campaign by 
pointing to an array of problems allegedly overhanging the economy. 
Among the most commonly mentioned were the credit crunch, 
brought on, depending on who was talking, by the comptroller of the 
currency and other overzealous bank regulators, the Basel Accords 
regulating bank capitalization standards among the G7, or 
hypercautious bankers; high import leakages that lower the 
multipliers from government or consumer spending and thus held 
down national income; cuts in defense spending; and reluctance by 
consumers and businesses to borrow while tunneling out from under 
the mountains of debt run up in the 1980s. Some analysts have also 
argued that Bush, like Martin Van Buren or Herbert Hoover, who 
also inherited their mantles from popular incumbents of the same 
party, was too much the prisoner of a winning political coalition to 
be able to change course when disaster loomed. - 

None of these views is foolish. All throw some light on the debacle. 
But they also abstract seriously from the historically specific 
concatenation of events and forces that wrecked the administration’s 
hopes for a political business cycle. 

The fundamental problem was indeed inherited from Reagan. But 
unfortunately for public understanding of the 1992 election, no 
investor bloc, hence no candidate (or, indeed, any commentator 
within earshot of average Americans) could bring himself or herself 

to pronounce in public what might be called the “FR” words 
—“Federal Reserve.” Accordingly, only select business and financial 
circles ever understood the dilemma—or even realized there was one. 

The basic difficulty was this: To restrain inflation and force 
adjustment to a changing world economy both at home and—this 
was less commonly admitted—abroad, the Reagan administration 
encouraged Paul Volcker to continue the high interest-rate policy he 
had inaugurated under Carter. Subsequently, as the gridlock over 
fiscal policy developed and the budget deficit ballooned, this reliance 
on monetary policy (code for high-interest rates that crushed 
aggregate demand) became almost complete. 

With the rest of the world growing more slowly than the United 
States, the high U.S. interest rates attracted enormous inflows of 
foreign capital and drove up the value of the dollar. - This, in turn, 
made overseas purchases by Americans cheaper and sales to foreign 
markets more expensive. The already rising tide of imports into the 
United States swelled enormously while exports fell way off. Because 
the growing trade deficit put additional crushing pressures on 
ordinary workers to make concessions to employers if they wanted to 
work at all, and because the administration hoped to link the rest of 
the world’s economies more closely to the United States (but 
especially Asia’s, whose rate of integration was historically lower), 
the Reaganites initially not only tolerated but welcomed the trade 

In the long run, however, the trade deficits generated strong 
protectionist pressures and complaints from exporters. In 1985, the 
Reagan administration dramatically reversed its celebrated policy of 
“benign neglect” of the dollar’s value. It began cooperating with the 
rest of the G7 countries to bring down the dollar and reduce the 
trade imbalances. 

From the standpoint of the Reagan-Bush political coalition, 
however, this amounted to a transit from Scylla to Charybdis. 
Because dollar devaluation implies a drop in purchasing power, and 
thus in living standards, it runs a serious risk of igniting struggles in 
the workplace over wage increases, and thus of “importing 
inflation.” The combined impact of the “double hammer” of high 
interest rates and growing imports was driving down workers’ wages 
and squeezing unprecedented bargaining concessions from 
employees, but financial markets, Fed policymakers, and most of the 
business community warned unceasingly about the dangers of 

“reigniting” inflation.— 

Helped mightily by the Japanese Ministry of Finance, which 
informally pressed Japanese insurance companies and other large 
bond buyers to keep purchasing (and thus keep the dollar from 
crashing), Fed Chair Greenspan slowly walked the dollar down in 
advance of the 1988 election. As it became clear that the recovery 
would continue through the fall (which was clear long before final 
campaigning began, because of the long lags through which monetary 
policy works), Greenspan tightened up again.— 

Throughout 1989 and 1990, with financial markets as anxious as 
ever about the slowly falling dollar, Greenspan held rates up to 
weaken aggregate demand. This tended to moderate the dollar’s 
decline and also to restrain wage demands by tilting the balance of 
power between labor and management still more in favor of 
management. In due course, however, the economy slid into 
recession. As the situation became increasingly tense, a very 
traditional minuet began between the administration, the Fed, and 
the business community. As the miserable population fretted and 
fumed, Greenspan said nothing, Bush said little, and the media 
reported a jumble of impressions incomprehensible to all but 

The shell game worked, as it usually does in an investor-dominated 
system. Attention was diverted from the Fed, to the extent that 
outside of very special circles, accounts of the 1992 election are likely 
to contain more references to Martin Van Buren than Alan 

If it hoped to get the economy moving by 1992, however, the Bush 
administration knew that it eventually would have to do something 
to give the Fed more room to ease. In early 1990, it decided to take 
the bull by the horns. As yet another extension of the Federal debt 
ceiling loomed, Bush and his advisers moved at last to rein in the 
ever-swelling deficit. 

This issue, like the high dollar, was another characteristic legacy of 
the Reagan years. Republican administrations had cut civilian 
spending massively and sought constantly to shift the burden of 
federal programs to states (which could not afford them, and thus, in 
the end, would end up killing them or scaling them back). Yet they 
never succeeded in obtaining reductions on the scale they wanted. 
Urban real estate interests in the Northeast, Midwest, and a few 
other areas broke with the administration and helped rally enough 

Democrats with congressional clout to preserve major spending 

The Republican coalition’s commitment to military spending, 
however, was intense. Even multinationals that boasted about the 
irrelevance of national borders to their businesses entered no such 
claim about the military force that backed up America’s global 911 
service. For the dwindling ranks of nationally oriented businesses in 
the Republican Party that were finding “America First!” an 
increasingly seductive appeal, the military was also virtually a 
religious cause. And for the military-industrial complex, itself, of 
course, “double-entry bookkeeping” had acquired an entirely new 
meaning: figures representing the federal deficit were simultaneously 
entries in its profits column. 

Accordingly, as the gridlock over the budget deepened in the 
1980s, Republican administrations just borrowed and spent. 
Eventually, they fretted, a day of reckoning would come. Civilian 
spending would succumb to growing financial pressures. In the 
meantime, buying weapons helped keep their political coalition 

Not long after President Bush took over, however, the unbelievable 
happened: the enemy began to vanish. Though in public the 
Republicans jubilated, and claimed credit, in private both they and 
many Democrats worried about pressures for reductions in military 
spending. Though the response of some of the armed services was 
truly ingenious—the navy at one point floated the idea of using 
carrier task forces in the Caribbean for drug interdiction—by 1990 
not even the Bush administration could pretend that the United States 
needed all the military forces it had. 

Hoping to open the way for Federal Reserve rate cuts, the 
administration proposed a budget that included a modest (2.1 
percent) reduction in military spending in fiscal 1991 and projected 
further declines of 2 percent a year in real terms over the next five 
years. It also suggested further slashes in civilian expenditures. With 
memories still fresh of Democratic wavering on the issues the year 
before, the president also pushed for a reduction in capital gains 

Although many administration supporters considered the capital 
gains issue a matter of the very highest priority, misgivings also ran 
deep, in and out of the White House. By now it was becoming 
acutely obvious that more than a decade of Republican economic 

programs had engineered one of world history’s great upward 
redistributions of income and wealth. Even some stouthearted 
conservatives were beginning to recall the story of King Midas. On 
Wall Street there was anxiety about eroding the tax base in the face 
of continuing high deficits, while some large banks and insurance 
companies with portfolios full of declining real estate feared a new 
round of sell-offs by investors who wanted to take their tax gains and 

Ever since the celebrated “feeding frenzy” that accompanied the 
first Reagan tax cut, many congressional Democrats, and particularly 
their leaders, had embraced large parts of the Republican agenda. 
While sometimes verbally denouncing America’s “right turn,” most 
had been more than happy to tap into the streams of cash that all 
through the 1980s coursed through Washington with almost Gilded 
Age brazenness. Over the decade, for example, Illinois Congressman 
Dan Rostenkowski, whose Ways and Means Committee had 
jurisdiction over tax bills, collected fantastic sums in PAC 
contributions alone.— 


Particularly after the 1988 debacle, this richly rewarded acquiescence 
attracted some notice. Even investment bankers occasionally 
complained that the Democratic Party no longer stood for anything. 
Senate Democratic Leader George Mitchell and House Speaker Tom 
Foley, accordingly, experimented with new tactics. In a preview of 
the 1992 race itself, they continued unchanged their basic policy of 
conservative, bipartisan cooperation with the administration—to 
such an extent that they became the first Democratic leadership team 
since the New Deal to fail to put forward a jobs program during a 
major recession. To attract disenchanted Democrats, however, they 
announced with great fanfare a series of legislative initiatives. Among 
these were bills mandating unpaid leave for child care and upholding 
abortion rights, plus a measure forbidding companies to replace 
striking workers. After sparring with the president and Republican 
congressional leaders, they would then symbolically try to pass the 
bills. If they succeeded, the bills would then go to the White House, 
where they would be vetoed, amid great publicity. Then, somehow, 
despite lopsided Democratic majorities in both houses, negotiations 
to pick up enough support to override would fail.— 

As the administration pushed on the capital gains tax, an almost 
comic sequence of events handed the Democratic leadership a 
stunning symbolic victory. Congressional Democratic leaders were 
known to be sympathetic to reducing capital gains. But when they 
tried to go along with the president, the rank and file in the chambers 
rebelled; 134 House Democrats, for example, sent a letter to the 
speaker insisting on raising taxes on the rich. As a result, positions 
hardened on all sides. 

When the president signalled a willingness to deal by indicating 
that he might accept a tax increase, his right wing rebelled. In the 
meantime, the Democrats were slowly waking up to the power of 
rhetoric about fair taxes. In July, even the conservative Democratic 
Leadership Council held a press conference to urge a more 
progressive tax code. 

With a Gramm-Rudman deadline for agreement nearing (which 
would automatically bring across-the-board cuts in spending to meet 
the deficit reduction act’s targets), and the economy sliding into 
recession, pressures were strong for some kind of agreement on the 
budget. Democratic leaders and the president reached a compromise 
that the mass membership on both sides of the aisle disliked for 
different reasons. Amid cries of treason from every side, the House 
rejected the measure. 

Encouraged by Treasury Secretary Nicholas Brady and Budget 
Director Richard Darman, President Bush then accepted another 
compromise bill. This measure gave his political coalition several 
things that were very useful to it, notably separate budget ceilings for 
military, international, and domestic spending. By preventing 
congressional Democrats from shifting between these categories for 
three years, the provision gave the military a grace period to develop 
a strategy and organize support to resist budget cuts. But there was a 
price: not only abandonment of capital gains reduction, but 
acceptance of a modest rise in taxes that contravened the president’s 
famous “read my lips: no new taxes” pledge at the 1988 GOP 

Conservative contributors raged. House Republicans, led by Newt 
Gingrich, who had deserted on the earlier budget compromise, 
sputtered angrily. In the meantime, Democratic leaders, who had first 
been pushed left by their members and then discovered that they 
liked it, gleefully pounced. They accused Republicans of trying to 
wage class war. In the midterm elections, Bush took what was 

generally regarded as a drubbing. 

Ever since, any number of interested parties have found it in their 
interests to promote the view that the president’s breach of his fiscal 
promise all but sealed his fate in 1992. This is pure propaganda. 
Only 14 percent of voters polled in the 1992 presidential election 
selected taxes as the leading issue in deciding whom to vote for. To 
most of the electorate, other economic issues—notably, growth— 
mattered far more at a time when the economy was doing poorly 
indeed. A great deal of other evidence also suggests that while 
Americans do not like taxes, particularly increases in taxes to pay for 
what they perceive to be government programs that do not work, the 
tax issue can only dominate voters’ calculations if the opposition 
party allows it to do so by default—generally by failing to make any 
kind of counterappeal. (It was just such a counterappeal, of course, 
that the conservative investor blocs that dominated the Democrats in 
the 1980s would not permit.)— 

Considering the 1990 recession—and the president’s reluctance to 
do anything but deplore it—it was no surprise that the electorate in 
the off-year congressional elections registered acute dissatisfaction. 
This would have occurred with or without the violation of the “no 
new taxes” pledge. Indeed, from a purely electoral viewpoint, Bush’s 
elephantine efforts to cut capital gains taxes probably turned off at 
least as many voters as the duties finally slapped on liquor, tobacco, 
motor fuel, yachts, etc. in the budget compromise. The shallowness 
of the whole episode in the face of policy success became obvious a 
few months later, as the president broke all records for popularity in 
the wake of the Gulf War. 

From Bush’s own perspective, accordingly, there was no reason to 
consider the wound mortal. Limits on the deficit, which the 1990 
Budget Enforcement Act appeared at the time to have provided, were 
a precondition for easing by the Fed in time for the 1992 election. 
The coast, it could reasonably be believed, was now clear. 

What, then, went wrong? 

It is doubtful that the usual litany of potential factors contribute 
much to answering this question. Whatever the causes—shrinking 
money and credit multipliers; lower spending multipliers; oil prices; 
war worries; and anomalous economic statistics arising from the Gulf 
War, or from cuts in defense spending—such factors could not fail to 
be noticed, given the long stretch of time (more than a year). Indeed, 
they eventually were noticed, triggering a torrent of anxious 

discussion. So were the deleterious effects on American exports of the 
ill-fated European effort to maintain parities in the European 
Exchange Rate Mechanism after German Chancellor Helmut Kohl’s 
decision to conceal the true costs of German reunification from 
German voters. 

Of course, the Fed almost certainly was taken by surprise at the 
slowness with which the economy responded. Everybody was. But 
with time to collect their thoughts, many critics saw what needed to 
be done. So did Greenspan. And while he always remained 
constrained by the problems of a depreciating currency—which in its 
last stages may have included modest threats of a flight from the 
dollar—he did bring rates steadily down, albeit in almost 
imperceptible steps. In December 1991, he sent the man who had 
recently reappointed him a handsome present, cutting the discount 
rate a full point just before Christmas. - 

By then the White House, and many others, knew there might be a 
problem. And they responded. To make sure reluctant consumers had 
the wherewithal to buy, Bush issued an executive order reducing for 
one year the amount of income taxes withheld. He also accelerated 
spending on federal projects. Then he challenged Congress to enact a 
new budget package within two months that included a cut in capital 
gains, a tax break for first-time homebuyers, higher tax exemptions 
for children, and even some spending increases. Though the president 
also sought long-term cuts in the deficit, it is clear what was on the 
White House’s mind. The package as a whole would surely have 
provided a short-run stimulus. 

It was here that the campaign came fatally apart, for reasons that 
had far more to do with investor blocs within the GOP than any 
straight calculation about votes in the fall. Just as they had in 1990, 
Democratic leaders demanded that the president pay for a stimulus 
by increasing taxes on the affluent. This time, however, Bush dared 
not even contemplate such a step. Not because he would gain votes 
by sticking to his guns (particularly after the Democrats had had time 
to “educate” voters, capital gains reductions in particular certainly 
figured to be a net vote loser, though a first-time credit for 
homebuyers might have been a winner from the standpoint of both 
politics and economics), but because the political situation had 
changed drastically. Whereas in 1990 the president could afford to 
bypass the angry conservatives of the GOP, now the massive bloc of 
conservative investors prepared to go to the wall over this issue 

(including investment banker Theodore Forstmann, supply-side gum 
Jude Wanniski, and any number of other stalwarts at the Heritage 
Foundation and other policy organizations) had someone else to 
throw their money and organizational resources behind. 

That someone was not Pat Buchanan, who appears to have 
attracted only a handful of really major investors, but Ross Perot, of 
whom more shortly.— For the present it is necessary only to round 
off the fatal details. Forced to stand firm, the president did. So did 
the congressional Democrats, who offered a “middle-class” tax cut of 
their own in time for Bush’s March deadline. This the president 
vetoed. Thereafter, he would not—because he could not—accept the 
congressional Democrats’ proposals, and they had no reason to 
budge on his. Thus ended all hope of fiscal stimulus. 

In the late spring of 1992, another heavy blow jolted the 
president’s reelection campaign. As any number of studies have 
observed, all through the eighties (and, of course, long before), the 
Republicans had shrewdly used racial appeals to help split a minority 
of white middle- and working-class voters—mostly males—away 
from the Democrats. (Few of these studies, however, acknowledge 
that to work, this strategy required that investor blocs in the 
Democratic Party veto strong cross-cutting economic appeals. Most 
also exaggerate the number of voters actually so influenced.)— Bush’s 
nomination of the exiguously qualified Clarence Thomas to the 
Supreme Court the previous year suggested that in 1992 the 
Republicans would be up to their old tricks. 

At the end of April, however, long-smoldering racial and ethnic 
frustrations burst into flames amid the collapsing California 
economy. Following the acquittal of four police officers who had 
been videotaped beating black motorist Rodney King, a genuinely 
multiracial riot broke out in Los Angeles. Over the next few weeks, 
disturbances flared in many more cities. While there were signs of a 
backlash, in the main the public response was exactly what most 
studies of race and politics would not have predicted: For all the 
clashing perceptions about the incidence of discrimination and 
attitudes toward integration, most of the public, regardless of race, 
recoiled from the videotape of the beating. They considered the 
verdicts unjust, and generally favored action to improve race 
relations and conditions in cities. Most also considered jobs more 
important than more police for coping with the problem. - 

Though the president did his best to make subliminal appeals, 

Perot, if not Clinton, was highly critical of Bush’s lack of leadership 
and unwillingness to take responsibility. The media and many other 
audiences were also antagonistic to the president’s feeble response. In 
the new climate, Willie Horton ads no longer were socially 
acceptable. Bush had lost perhaps his most important remaining 
electoral card. 

By then, anyone could see that the Bush campaign was in difficulty. 
Gradually, what no one would have believed a year before was 
becoming plausible: that George Bush might be pushed from power 
before Saddam Hussein was. 

Many commentators—indeed, probably most of them—remained 
dubious, however. They could not really bring themselves to believe 
what they were seeing—and there was plenty to justify their 
skepticism. The likely Democratic nominee was actually running 
third in the spring polls, and he appeared extraordinarily vulnerable 
to one of the Republican Party’s patented “character” assaults. And 
though Perot increasingly loomed as a real threat, the consensus was 
that he, like John Anderson before him, was destined to wilt in the 
summer’s heat. In the meantime, Bush remained the incumbent, able 
to shape events, dispense patronage, and raise campaign funds. 

In regard to raising campaign funds, at least, the president was as 
yet in no trouble at all. At that time, the great bulk of American 
business, in particular a cross-section of America’s multinational 
giants, still remained firmly behind him. Analyzed systematically, as 
in table 6.1 , the extent of the president’s support across an entire 
sample of major contributors was breathtaking: 55 percent of all the 
firms contributed—and this method of counting leaves 
noncontributors in. Much of this money came in very early. Indeed, 
in a special survey of early money (received before December 31, 
1991) that I undertook in the spring of 1992 (not shown here), 
almost a fifth of the sample had already contributed to Bush’s 
reelection campaign—a truly remarkable rate, considering that far 
and away the most money piles up as the primaries actually get under 
way. No other candidate was even close. Clinton, who clearly came 
next in the affections of this group of major investors, then trailed far 
behind, while Buchanan—the president’s opponent in the GOP 
primaries—barely registered.— 

To most members of this “golden horde”—top executives in oil 
companies (such as Exxon, Amoco, Chevron, Arco, Occidental, 
Pennzoil and many Texas independents), international banks (Chase, 

Chemical/Manufacturers Hanover), many investment houses 
(Morgan Stanley, Merrill Lynch, Nomura Securities, Shearson) and a 
long list of manufacturing, food and defense companies (General 
Electric, IBM, Motorola, Rockwell, Corning, Texas Instruments, 
Martin Marietta, Coca-Cola, Pepsico, Johnson & Johnson, AT&T, 
McDonnell Douglas, GM, and—this was after all, late spring—Ford 
and even Chrysler), plus many utilities and service companies—the 
president’s goals remained the right ones: global integration of 
markets for goods, capital, and, much more quietly, people; and 
preserving America as sole superpower and principal leader of the 
“new world order”, with only the most modest tempering of laissez 
faire at home. 

Firms in sectors facing a variety of quite specific problems were 
also generous contributors. Among these were companies and 
executives in the insurance and pharmaceutical industries, where the 
threat of national health care was urgent, as well as those in the 
chemical industry, where environmental pressures were acute.— To 
top executives from these and many other firms in the spring of 
1992, Bush may no longer have looked like a certain bet, but he still 
looked like their best one. 

TABLE 6.1. Party and Industry in the 1992 Election (N = 948) 

Percentage of Firms Contributing to 

Bush Campaign 55% 

Clinton Campaign 21 % 

Source: Calculated from data from Federal Election Commission. 

Note: Includes individual contributions, soft money, and PAC donations through the last 
week of October 1992. 


To understand the 1992 Democratic campaign and the new Clinton 
administration, it is essential to realize that the Nightly Business 
Report’s “handwriting on the wall” episode (discussed in the 
introduction to this book) was a culminating moment in a process 
that stretched back over a decade: the effort by center-right business 
groups to remake the party in the wake of the triumph of Reaganism. 
Though the first stirrings of this effort trace back to the Carter years, 
the most striking shifts occurred after the 1980 debacle.— 

At that time—and subsequently, for this “right turn” had to be 
reconfirmed at every election—Democratic leaders could have tried 
to rally the millions of middle-class and poor Americans who were 
about to suffer the economic reverses that the party, in a vastly 
different context, was at last willing to discuss in the 1992 campaign. 
They could have tried, for example, to explain to voters what 
Reaganomics was really all about: the years of high interest rates and 
austerity that the President’s policies would entail; the massive export 
of American jobs that loomed; the steady deterioration of schools, 
roads, and services that would ensue; the demoralization, crime, and 
drugs that would mushroom in big cities and, eventually, in whole 
regions; the true costs of deregulating not only savings and loans, but 
airlines and the banking system; or the swelling tide of money that 
would corrupt all levels of government and overwhelm other forms 
of political participation. 

For the most part, Democratic Party leaders did not even try to 
sound these warnings. Instead, as they contemplated the real estate 
boom around Washington and the skyrocketing compensation of 
America’s corporate managers, they decided to compete with the 
Republicans for funds. Amid much flatulent oratory about finding a 
“third way” between New Deal and Great Society liberalism (whose 
programs and formulas certainly needed updating), and facing what 
was then a newly self-confident Republican conservatism, the entire 
spectrum of respectable discussion in the party lurched to the right.— 

In 1984 and 1988, the Democratic Party’s strategy for the 
presidential race turned on the pursuit of investor blocs disenchanted 
by one or another feature of Reaganomics: In 1984, investment 
bankers critical of the deficit (led, among others, by two New 
Yorkers named Robert Rubin and Roger Altman, who flew out to 
Minnesota to press Walter Mondale on the issue shortly before his 
ill-fated pledge to raise voters’ taxes) and of Reaganite talk of 
abolishing or weakening Roosevelt’s Glass-Steagall Act (which 
separated investment from commercial banking) flocked to the party. 
So did urban real estate interests (centered mostly in the Northeast 
and Midwest), whose needs for continuing federal aid for mass 
transit and the infrastructure put them at loggerheads with the 
Pentagon over a share of the budget.— 

In 1988, this conservative, business-led, but not Republican 
coalition widened appreciably, as the investment bankers and real 
estate interests were joined by many high-tech and other businesses 

still in favor of free trade but increasingly edgy about administration 
policies that allowed the Japanese to run massive trade surpluses year 
after year.— 

At the same time, the party was also restructuring its relations with 
its (former) mass base. The most critical of these efforts involved its 
ties with organized labor. In the early 1980s, Democratic National 
Committee Chair Charles Manatt worked out an understanding with 
the AFL-CIO that guaranteed labor continued representation within 
the DNC apparatus. Despite criticism from some business elements in 
the party, this arrangement survived. In due course came another 
momentous shift. Congressional Democrats, with timely bipartisan 
assistance from influential Republicans, applied an old tactic— 
business and government subsidies to amiably inclined elements of 
the labor movement—on a grandiose scale. Through the National 
Endowment for Democracy and other government agencies, 
enormous subsidies flowed to union leaders for foreign activities 
associated with the cold war. By the mid-1980s, the AFL-CIO was 
spending over $40 million a year on foreign activities, a sum almost 
equal to its total domestic budget. Approximately 90 percent of this 
money came from the U.S. government. Revenues on this scale 
virtually ensure that AFL-CIO membership losses can continue for 
decades before the leadership will have to face the problem, in sharp 
contrast to the thirties, when declines in dues-paying members helped 
squeeze several reluctant union leaders to split from the rest of the 
moribund and corrupt AFL and organize the CIO.— 

The party leadership also confirmed a long-standing pattern of 
trying to organize other potential mass political constituents— 
African-Americans, Hispanics and Latinos, women, even 
environmentalists—along almost Balkan lines. An earlier coauthored 
work traced in some detail how in the late seventies, these emerging 
social movements restructured in response to the combined pressures 
of financial exigencies, selective press coverage, and political 
patronage. What had started out as grassroots social movements 
were now developing more complex organizational structures. At the 
top were legally incorporated, hierarchically structured institutions 
dependent for their functioning on expensive lawyers, foundation 
grants, and steady political patronage. Increasingly tending to define 
the very real problems of their constituencies in conservative, market- 
oriented terms, the leaders of most of these institutions rarely even 
considered strategies such as attempting to raise the incomes of the 

vast majority of underpaid African-Americans, Latinos, or women by 
unionizing them. Instead they sought to function as junior partners, 
or often even paid advisers, to businesses and the Democratic Party. 
Frequently they refrained from even verbal condemnations of the 
party’s commitment to economic austerity.— 

Given the party’s decision to pursue money, there was no chance of 
developing a message that would excite a mass audience. The 
formally organized constituency groups, accordingly, were of 
immense value to the party. By selectively doing business with their 
leaders, the Democrats could practice a sort of symbolic mass 
politics. By drawing on the energies of their core members, the party 
would acquire an ersatz mass base to replace the millions of voters it 
was abandoning. 

There was a downside: Because the leaders of these groups held 
back from criticizing the party’s conservative macroeconomic 
policies, their own demands for more access and positions could 
easily be made to look purely self-interested (which, when divorced 
from any critical stance toward common problems, they often were). 
In the money-driven American political system, public attacks by 
rival financial groups partake of the logic of a nuclear exchange 
between superpowers. They are, accordingly, rare, and “proxy” wars 
or symbolic political struggles between the respective “mass” clientele 
groups fill most of the political universe. As a consequence, 
Republicans and right-wing Democrats could fan immense 
resentment by talking as though, for example, the clientele groups, 
rather than the party, were breaking all records for fundraising or 
had pushed Mondale to make his fatal promise to raise taxes. Also, 
to the extent that any of these groups preserved any real links with 
their base, they remained a potential obstacle that could, on occasion, 
prove startlingly inconvenient. Still, a party had at least to look like it 
wanted a mass base, and these groups were all the Democrats had. If 
the party was to advance the cause favored by its less conservative 
business leadership, organizing anything else normally ran too many 
risks, even promoting voter registration, as opposed to promoting 
carefully targeted drives to get out the vote of the already registered. 

In the wake of the 1984 election, many of the party’s business 
interests reckoned that the cost of dealing with several of these 
groups—notably organized labor (whose pre-primary endorsement, 
along with those of many business groups, of Mondale upset many 
conservatives), Jesse Jackson’s “rainbow coalition,” and various 

defense and foreign policy groups (including some which 
intermittendy claimed strong business support)—was still too high. 
They, accordingly, organized a new group to push the party even 
further to the right. Calling itself the Democratic Leadership Council, 
the group was led in public mostly by Southern politicians. No one, 
however, should be fooled: it was financed extensively from New 
York—not least by investment houses—and by defense concerns and 

The subsequent rise of Clinton has focused a great deal of attention 
on the DLC. While easy to understand, this impulse is perhaps 
misleading. In all probability, the thunder and lightning—such as the 
practice of in effect auctioning off places at its convention to 
corporate lobbyists—drew more attention to the storm than it 
deserved. As the 1988 race quickly demonstrated, there were few, if 
any, real conflicts of interest between the national party and the 
DLC. Not only had the national party long been self-consciously 
moving right, but in the mid-1980s, the wonderful world of “soft 
money” opened up for it. Soft money—donations given nominally to 
state and local parties for purposes unconnected to federal races, but 
that are in fact closely connected to national parties and particularly 
to presidential campaigns—was completely unregulated at the federal 
level until 1991. At that time, the Federal Election Commission (FEC) 
decided that whatever was spent had to be reported. State regulation 
was, as ever, minimal. Not surprisingly, affluent Americans and 
corporations quickly seized on this loophole to eviscerate laws 
regulating the size of campaign contributions. Contributions of 
$100,000 or more were common. The result was evident in the 1988 
election. Michael Dukakis selected as his running mate Lloyd 
Bentsen, whose fundraising prowess qualified him as the six-million- 
dollar-man of American politics—and ran essentially even with the 
fabled Bush money machine in total funds raised. 

Following the 1988 loss, Ron Brown took over the DNC. 
Dissolving the doubts of skeptics, who initially suspected the Patton, 
Boggs & Blow partner of sharing Jackson’s goals, Brown worked 
closely with congressional Democratic leaders and business groups to 
help raise millions of dollars for the party, and many millions more in 
soft money.— 

These efforts coincided with a series of economic changes that had 
major effects on one of the Democrats’ core constituencies in the 80s: 
real estate. Such changes included the collapse of real estate values in 

some parts of the country, the increasingly hopeless conditions of 
many major cities, and the lagged effects of 1986 Tax Act, which 
eliminated several important real estate tax breaks. Amid signals by 
the Bush administration that it might be open to restoring some of 
the tax breaks and moves by leading American developers into 
Europe (which assuredly changes their calculation regarding the 
potential role of military force and the optimal configuration of U.S. 
budget), major real estate interests began backing out of the party. As 
those interests were the heart of the Democrats’ “fairness” coalition, 
all mention of this virtue vanished from the Democratic Party 
vocabulary, along with most references to the poor or to cities.— 


Though an almost invisible seam perhaps remained in regard to 
organized labor, by 1992 the biggest remaining difference between 
the DNC and the DLC may well have been the middle initials. Ron 
Brown had an easy time (and many allies) in persuading Jackson not 
to run. No Democratic leader rose to rebuke him for his harsh 
attacks on Jerry Brown’s criticisms of money’s role in American 
politics. On at least some occasions, the party appears also to have 
sought to charge poor farm groups for the right to address the 
Democratic platform committee.— 

The collapse of the real estate constituency within the Democratic 
Party (note that the discussion is in reference to interests comparable 
to those on the Forbes 400 list of richest Americans; smaller fry are 
of course scattered everywhere among the FEC contributor lists) 
explains why the truly sophisticated response to Nebraska Senator 
Bob Kerrey’s celebrated retort in the primaries to Jerry Brown—“Are 
you saying that I am bought and paid for?”—might well be, in the 
end: “No—and so much the worse for your campaign.” 

Of all the Democratic primary candidates, Kerrey’s pattern of 
contributions from the sample of top business figures I analyzed most 
resembles Mondale’s or Dukakis’s: knots of urban real estate 
magnates, investment bankers (including, according to one 
newspaper account, Volcker, by then at J. D. Wolfensohn & Co.), a 
handful of oilmen, plus some Hollywood figures. There just weren’t 
enough of these types, however, to float a mild center-left campaign 
with a serious thrust on health care—an issue guaranteed to bring 
down on the head of anyone who raised it a mass of well-financed 

objurgation. As a consequence, Kerrey looked around hastily for 
other issues to emphasize, and made the fatal choice of international 
trade. While also popular with voters, who at that time favored 
restricting imports of foreign consumer products by such margins as 
71 percent to 22 percent (with 7 percent having no answer or no 
opinion), the issue was a core concern of multinational industry and 
finance in both parties. — Amid another fusillade of bad press notices, 
Kerrey began flailing. On some days he dramatized himself as a 
quasi-protectionist hockey goalie; on another, a free-trader (who lets 
the puck go by?), and so on. The campaign collapsed, leaving behind 
a large debt. 

Iowa Senator Tom Harkin’s campaign appears to have been 
another that suffered from the collapse of the realtors’ bloc within 
the party. In the very earliest stages of the race, prominent developers 
within the party touted his candidacy. Their support, however, never 
materialized (one initially vocal developer whose contributions I 
made a special effort to trace turned up as a contributor to 
Massachusetts Senator Paul Tsongas and Clinton, raising the 
question of whether the true aim of the early talk about Harkin was 
not to weaken New York Governor Mario Cuomo by tempting 
another perceived liberal into the race). 

Harkin compounded his difficulty by making two grave mistakes. 
First, as some critics promptly noted, while the Iowa-based head of 
one of the largest insurance companies in the United States and other 
industry executives contributed to the campaign, Harkin dodged the 
health-care issue that Senator Kerrey so bravely raised. 

Second, the candidate and his staff confused running a campaign 
with holding a seance. That is, in 1992, it was simply not enough to 
invoke the shade of Roosevelt (or, more precisely, of “traditional 
Democratic values”), or even to assure voters what a study of 
Harkin’s career readily confirms: that, save perhaps on insurance- 
related issues, the Iowa liberal was indeed “on the side of” average 
Americans. To reach an increasingly jaundiced electorate requires not 
indirect discourse, symbols, etc., but plainspoken efforts to pound 
away on the handful of major issues that really matter to people—as, 
in different ways, Jerry Brown, Tsongas, and Perot all did later in the 

Harkin, however, usually confined himself to an inside game 
increasingly dependent on the official union movement, which is now 
widely unpopular even with its own members. The PAC support that 

Tsongas criticized him for in the early primaries never amounted to 
much, with the result that Harkin had almost no money to transmit 
his unstable and somewhat Aesopian message. (It cannot have helped 
that the first primary outside of his home state occurred in one of the 
most strongly anti-union states in the country.) Around the time he 
withdrew, 75 percent of the population were telling pollsters that 
they didn’t know enough about him to have an opinion.— 

Running out of money, by contrast, was one problem that Clinton 
never had to face. Like Dukakis four years before, but unlike 
Mondale, the Arkansas governor began the race with strong support 
from businesses in his own state, including Tyson Foods, Murphy 
Oil, Wal-Mart (where his wife Hillary sat on the board and whose 
owners, the Walton family, were almost all campaign contributors); 
giant Beverly Enterprises, a large private provider of health care; and 
the investment banking, oil, and gas interests associated with the 
Stephens family. 

It may be sheer coincidence that back in 1976 the latter were also 
close to Carter as he began his run for the White House. But the 
Clinton campaign’s striking resemblance to the earlier Carter effort— 
in which a moderate conservative (former) member of the Trilateral 
Commission with some well-disciplined center-left humanitarian 
impulses ran from the periphery of America, supported by 
internationally oriented investment bankers and their allies in Wall 
Street, Washington, and the press—was certainly not accidental. 

In 1992, however, most of American business was far more 
conservative than it had been in 1976, when, it should be recalled, 
the much more liberal Morris Udall could find important business 
supporters in addition to his labor backing. As a consequence, 
Clinton’s candidacy centered far more on investment bankers than 
Carter’s did. 

Partners from giant Goldman, Sachs, for example (which, with the 
cloud that settled over Salomon Brothers now ranks as probably the 
strongest of all the investment houses), were among the earliest to 
begin raising funds for Clinton. Members of the firm—whose leading 
figure, Rubin, once compared the Glass-Steagall Act to the Magna 
Carta, only half in jest—contributed far more than $100,000 to the 
campaign (while, of course, raising many times that). Another early 
fund-raiser among investment bankers was Altman, vice chair of the 
Blackstone Group, who had known Clinton in college and who is 
reported to have renewed ties after encountering Hillary Rodham 

Clinton on the board of the Children’s Television Workshop, 
producer of the highly acclaimed Sesame Street. Peter Peterson, chair 
of Blackstone (and husband of Joan Cooney, chair of the executive 
committee of the Children’s Television Workshop), was another early 
contributor. So were many other prominent investment bankers from 
Greenwich Capital Resources and other large houses.— 

With the obvious, though very important, exception of Glass- 
Steagall and related financial regulatory legislation, such interests 
differ only marginally from the internationalists at the core of the 
Bush coalition with respect to either foreign or domestic policy. More 
than a few, including Goldman and Blackstone, have Japanese 
partners (though Sumitomo, Goldman’s partner, holds only a 
minority stake). Together with the myriad of Washington lobbyists 
for U.S. and foreign multinationals who contributed heavily to the 
campaign (and honeycombed the campaign organization), these 
interests virtually guaranteed what in any case rapidly became 
obvious: that the Clinton campaign accepted free trade and an open 
world economy as its fundamental strategic premise. 

Though only someone aware of Georgia Senator Sam Nunn’s early 
endorsement of Clinton’s efforts, or paying close attention to the 
striking contributions rolling in from aircraft and other defense 
producers could be sure of the fact at the time, the campaign also 
fully accepted what the foreign policy community likes to call the 
“responsibilities” that go with being the world’s only superpower. — 
(Indeed, by convention time, the Clinton camp was actually 
leapfrogging the Republicans in this regard, with volleys of neo- 
Wilsonian rhetoric suggesting that the Bush administration, which 
after all, averaged an armed intervention nearly every 12 months or 
so in office, was not aggressive enough in promoting freedom, human 
rights, and democracy around the world.) 


What, then, distinguished the Clinton effort from the multinationally 
oriented Bush administration? At first glance, the response seems 
clear: Not much. But this is too clever by half. If one examines the 
data presented in table 6.2 ’s analysis of sectors contributing 
disproportionately to the Clinton campaign in the light of the 
campaign’s rhetoric and proposed policy initiatives, an interesting 
pattern emerges. With one exception, the sectors that 

disproportionately backed Clinton appear to share several 
characteristics. On one hand, like the mainline multinationals that 
dominated the Bush coalition, they support an open world economy. 
On the other hand, in contrast to the “borderless world” celebrants 
on the Republican side, they all have some direct, crucial tie that 
links them closely to the American state. The aircraft companies 
clearly depend on the government in an almost unique way; but 
almost equally apparent are the ties to government of the investment 
houses (whose Glass-Steagall privileges are currently up for grabs in 
the negotiations over foreign banking rights that are part of the 
ongoing GATT negotiations); the oil and gas industry (note, 
however, that this was one campaign that probably ran on gas, rather 
than oil: Clinton’s Texas campaign managers were openly promoting 
the “clean-burning” fuel, and the candidate himself had a fairly long 
record on this point);— transportation; and tobacco (where the 
sample size is very small). 

One might well ask about the utilities industry, which is not listed 
in the table, but which certainly has a peculiarly strong dependence 
on the state. Here reality may be sending a message: By conventional 
standards, the results for utilities (29 percent and N = 31, with a .28 
level of significance) just miss qualifying for the table. This is one 
industry that may in fact be affected by the data in the FEC’s final 
report, which has been delayed, and will not be available for some 
time. As a practical matter, I have reckoned it as a part of Clinton’s 
coalition at least since he added A1 Gore to the ticket. In my 1988 
study, support for Gore’s presidential bid from this sector was strong, 
and the Tennessee senator has long been identified with technological 
issues of concern to the telecommunications industry and utilities.— 

The one instance where the question of state dependence appears 
to break down, what table 6.2 refers to as “capital-intensive 
exporters” (my portmanteau term for an industry which includes 
Xerox, Honeywell, Kodak, and similar firms), is an exception that 
proves the rule. These are clearly firms that in several cases (Xerox, 
Kodak) have made strenuous and sometimes noisy efforts to reinvent 
themselves in the face of foreign (usually Japanese) competitors. They 
are rather obviously looking for an ally in the Clinton administration 
to help with both subsidies and market penetration problems. 

All of this is to say that the Clinton coalition is exactly what 
several of the executives interviewed on the Nightly Business Report 
indicated it was: a bloc of businesses that are prepared to 

countenance a cautious public rejection of laissez faire because they 
need the American state to work. Given the exceptional dependence 
of their businesses upon that state, they cannot simply go somewhere 
else if the relative decline of the United States in the current world 
economy continues unabated. 

In the best-known cases of industrial support for Clinton, 
calculations along these lines were clearly operative. Because table 
6.2 refers to large firms and relies on sectoral assignments that are 
derived from and out of the Bush administration that all would be 
well if everything were left to the invisible hand. Indeed, in the mid¬ 
eighties, after the Reagan administration declined to press ahead on 
recommendations for a more active role for the government in what 
has come to be known as “industrial policy,” Young, who had 
chaired a special blue-ribbon President’s Commission on Industrial 
Competitiveness, complained. When the administration still declined 
to move, Young and like-minded chief executive officers established 
their own privately funded Council on Competitiveness to promote 
their ideas for change in business-government relations. (One of the 
consultants they hired was Ira Magaziner, viewed by most of the 
business community as a virtual Jacobin, and a prominent supporter 
of Clinton for President. Eventually, of course, a large section of the 
high-tech industry came noisily over to the cause of the Arkansas 

TABLE 6.2. Industries Significantly Above the Mean in Support of Clinton (for the mean, 
see table 6.1 ) 


50% (.20*) 


Oil and gas 

28% (.18) 

N= 65 

Capital-intensive exporters 


N= 7 


54% (.00*) 

N= 13 


38% (.12*) 

N= 16 


33% (.08) 

N= 33 

Investment banking 

46% (.00) 

N= 50 

Source: Computed from FEC data; see text. 

Notes: Figures in parentheses are significance levels. Note text caution about utilities 
industry (not shown above). 

"'Expected value of cell in chi-square less than 5 is warning of low power. Significance levels 
reported in such cases are results of Fisher’s Exact text. 

The Clinton campaign’s now-celebrated interest in “managed 
trade” and in more aggressive efforts to pry open foreign markets 
echoed proposals recently advanced by many of these firms.— 
Certain parts of the computer industry are thoroughly transnational, 
to the point of agitating against national actions in favor of the 
industry. But other sections of it and related industries, including 
(portions of) semiconductors and most of the software industry, have 
concerns that only coordinated action on a truly large scale can 
relieve. Many firms, for example, view themselves as pitted against 
“Japan, Inc.” Up against what they perceive as the resources of an 
entire country, these producers strongly champion the view that 
laissez faire is obsolete. Many, in addition, believe that timely 
government action (for example, on education) would also assist 
their industries by widening their markets or improving the skills of 
their workforce. As is discussed later, software producers, in 
addition, are acutely aware that the position of English as a 
worldwide second language (and thus the world’s premier software 
language) is bound up with the long-term position of the United 
States in the world economy. 

In sharp contrast to firms in older industries such as steel or 
textiles, however, most of these firms actively import components. 
Often they also sell abroad, so that they continue to distrust high 
tariff policies. At the Little Rock economic summit in December 
1992, for example, Sculley, a strong promoter of both Clinton and 
“competitiveness” initiatives (as such industrial policy initiatives are 
now frequently styled), flatly ruled out protectionism.— But with the 
continuing growth of the Japanese trade surplus and the persisting 
over-valuation of the dollar relative to the rest of Asia, these firms 
and many others increasingly have come to accept the practical 
necessity for managing trade with the export-oriented economies of 
that region, especially Japan’s. They also want what the Clinton 
campaign promised to give them: substantial programs of 
government subsidies through existing cabinet departments, and a 
civilian counterpart to the Defense Department’s Defense Advanced 
Research Projects Agency (DARPA). 

As far back as 1984, carefully superintended programs along these 

lines were winning acceptance from prominent Democratic 
investment bankers. By now, few on the top rungs of American 
business, or in the military, dispute that economics is as vital to 
national security as any defense treaty or military base. Within the 
part of the business community that was sympathetic to Clinton (and 
a few other candidates who raised similar issues), there is also 
curiosity about the advantages of “organized capitalism” on (what is 
imagined to be) the German or Japanese model. To these groups, 
Clinton’s promise of an “economic security council” (as the new 
National Economic Council was referred to during the campaign) on 
a par with the National Security Council appeared about as 
dangerously radical as the program to restructure the U.S. military 
advanced by Clinton’s early champion, Nunn. And the celebrated 
Clinton tax proposals, calling for a small rise in their taxes, looked 
more like political cover for new programs that would benefit them, 
first and foremost.— 

Few Americans, however, are familiar with the strong, top-down 
state structures evolved by foreign business groups to catch up with 
their more advanced rivals in the Anglo-Saxon countries. As a 
consequence, all many Americans could see in these and similar 
proposals was the break with laissez faire. 

To hard-pressed voters, who knew little and understood even less 
about Greenspan or the Fed, but who were increasingly anxious 
about the maddeningly slow pace of the economic recovery and saw 
all around them signs that the United States was secularly declining in 
the world economy, all this meant only one thing: relief, something at 
last that would benefit the average person. 

This was a perception that the Clinton campaign fanned 
assiduously by all sorts of devices. In the campaign it put out front 
not Rubin or Altman, but a flock of liberal former Vietnam-era 
protesters destined for second-tier slots in the administration (or no 
positions at all). For a long time the Clinton camp also talked around 
the fact that their candidate had flatly rejected a proposal advanced 
by more than 100 economists for a temporary two-year job creation 
bill, while excitedly promising that the candidate would boost 
economic growth in the long run by increasing public investment in 
education, the infrastructure, and the environment. (Eventually, as 
even some bond traders began calling for a modest stimulus, Clinton 
relented. The issue was used with telling effect against Bush in the fall 
campaign. After the election, as already noted, it was scaled back 

almost to the vanishing point and then defeated in the Senate.) 

The candidate and his economic advisers put out an economic plan 
filled with optimistic figures suggesting that Clinton could halve the 
deficit in his first term while implementing a tax cut for the middle 
class. They also promised to somehow reform the health-care system, 
while, as is discussed below, collecting substantial campaign 
contributions from parts of it. And—very quietly—the Clinton 
campaign lined up with trial attorneys, whose campaign to stop tort 
reform is now running in high—and very expensive—gear. 

This set of appeals was probably the most brazen conflation of 
electoral Dicbtung and investor bloc Wabrbeit since “read my lips,” 
but it worked. In the beginning, when he trailed far behind, for 
example, Jerry Brown in the Gallup polls, Clinton was built up 
massively by most of the press.— 

In Clinton’s one moment of maximum danger—the Gennifer 
Flowers scandal—the combination of money and favorable press 
coverage, along with the Clintons’ own TV performance, saved the 
day. With their candidate on the ropes, investment bankers from 
Goldman and other houses organized a gigantic dinner at the 
Sheraton in New York only a few days before the New Hampshire 
primary. The affair raised more than $750,000. No less importantly, 
as one investment banker observed, “that dinner signaled to a lot of 
people that some very smart money was behind him. It was critical to 
Clinton’s campaign.” — In sharp contrast to the treatment meted out 
to Gary Hart, all but the yellow press put the story behind it, while 
proclaiming that a second-place finish would keep Clinton viable. 

Clinton’s strategy for winning the Democratic primaries ultimately 
came down to a financial counterpart of the Russian strategy that 
turned back Napoleon: Just keep spending, until your opponents run 
out of money. 

Sometimes, the resulting irony was almost painful. Tsongas, for 
example, entered the race as a self-declared “pro-business liberal.” If 
one wanted a tag line for this effort, one could do worse than to sum 
it up as the Route 128 view of American politics. Both the 
campaign’s definition of America’s economic problems and the most 
controversial parts of its proposed solutions (along with much of its 
early money that wasn’t raised from ethnic Greek businesses) 
originated from around the famous high-technology highway. 

Tsongas himself had served as a director of a number of major 
New England concerns. Among these were Boston Edison and several 

hightech firms, including Wang Labs and one subsidiary of the highly 
regarded Thermo Electron, founded by George Hatsapoulos, the 
Greek-American MIT graduate who was then serving as vice chair of 
the American Business Conference. 

Hatsapoulos has produced a stream of papers (some coauthored 
with Summers and Paul Krugman of MIT) on the cost of capital as a 
factor in U.S. economic growth. In the campaign, Tsongas said often 
enough that he took the capital problem very seriously. A capital 
gains tax cut for long-term holdings was the remedy he proposed, 
along with a further tilt by government in the direction of business, a 
sharp reduction of the federal deficit, and sweeping education 

By the usual standards of American politics all this should have 
resulted in a shower of money for his campaign. But it did not, for 
the simple reason that Clinton had already cornered the market. 
After what was usually said to be a surprise victory in New 
Hampshire (although Tsongas had been campaigning in the state for 
almost a year and, by concentrating his funds on a neighboring state 
where he was already well known, was not badly outspent), his 
campaign coffers were almost empty. Though some money streamed 
in, he had to scramble to line up TV in the big multistate media 
buyouts in the South and Midwest. Clinton, with most party 
organizations already behind him, in the meantime unrolled the 
mighty bankroll. As donations from major investors in my sample 
poured into his campaign, the Arkansas governor denounced Tsongas 
in almost populist tones as unsympathetic to ordinary Americans, an 
enemy of social security, and an advocate of a regressive gas tax. 
Tsongas’s efforts collapsed, and turnout generally declined. Those 
blue-collar workers, African-Americans and lower-income voters 
who did vote cast ballots for their “champion,” Bill Clinton. 

That left only Jerry Brown. To the amazement of virtually 
everyone, Brown, whose refusal to take donations larger than $100 
was driving party leaders to distraction, gamely hung on.^ In 
Michigan, the leadership of the United Auto Workers union (though 
not all locals) lined up behind Clinton, who favored the North 
American Free Trade Agreement that the union opposed. Brown, 
who opposed the pact, pointed up the hollowness of Clinton’s 
populism and did well. In Connecticut, he briefly panicked the 
establishments of both parties by winning. 

The showdown came in the New York primary. Here Clinton’s 

money afforded him almost complete domination of the airwaves. 
This turned out to be decisive when Brown began promoting a 
regressive “flat tax” plan that he appears to have hoped would win 
him plaudits on the right. Instead, Clinton focused his attack on the 
plan, thus positioning himself once again to Brown’s left. The media 
played along. While the New York Times did eventually affort 
Brown’s plan some less than dismissive notice, that mostly came long 
after the primary. Before the primary, however, the Times had very 
little good to say; indeed, it had surely been many years since the 
New York Times had been so solicitous about the progressivity of 
income taxes.— 

Clinton’s victory in New York effectively clinched the nomination. 
Almost up to convention time, however, rumors ran rife that one or 
another Democrat was considering an eleventh-hour challenge. By 
then, however, the big story was no longer the Democratic opponent 
to George Bush but the astounding emergence of a serious new 
challenger. In the most remarkable development of all in a year of 
surprises, an overwhelming historical force—$3.5 billion—had 
suddenly materialized from out of the Southwest. 


Not surprisingly, conventional political analysts, face to face with the 
truly unconventional, have had trouble coming to terms with Ross 
Perot. Most have repeatedly seized on almost any excuse to avoid 
taking him seriously. In July of 1992, when he first pulled out of a 
race he had never officially entered, many wrote him off as a 
lightweight with a heavyweight bankroll, a gadfly with no staying 
power. Others took him more seriously—but only as a threat: as 
Ross Peron, the man who would be king; Hercule Perot, P.I.; or 
simply (as one veteran Pentagon official delicately phrased it), a 

As he reentered the race in October, with his poll ratings in single 
digits, most pundits laughed. After he stole the show in the debates 
and finished with 19 percent of the total vote (after Theodore 
Roosevelt in 1912, the strongest showing by a third-party candidate 
in the twentieth century) analysts suggested it really hadn’t mattered, 
since polls indicated that Perot voters split their second choices 
almost evenly between Clinton and Bush. Many election watchers 
also predicted that Perot would quickly fade into the woodwork, a 

claim they rushed to repeat as his poll ratings dipped once again after 
his celebrated tussle with Vice President Gore over NAFTA. 

In a serious analysis of the 1992 election this obviously is not good 
enough. As is discussed below, it is in fact not easy to pin down 
precisely how Perot influenced the mass politics of the 1992 election. 
But there is evidence that it was he, rather than Clinton, who first cut 
Bush down to life size after Bush’s Gulf War triumph. By focusing 
sharply on the economy, the Texan almost certainly made it easier 
for Democrats to attack Reaganomics, and he surely was in part 
responsible for the emergence of the deficit as a major national issue. 
By timing his pullout to coincide with the opening of the Democratic 
National Convention, Perot also helped Clinton become the cynosure 
of the nation at a truly critical moment. The reappearance of the 
fireball from the Lone Star in October, in addition, appears to have 
considerably increased voter interest in the race. 

Particularly from an investment theory perspective, however, much 
more can be said about Ross Perot’s Coney Island-like traversal of 
the American political landscape. In recent years, brief, sizzling 
appearances on the national political stage by charismatic business 
tycoons promising national renewal have become almost as common 
in world politics as reported appearances of the Virgin Mary have in 
world religion: Something recognizably akin to the “Perot 
phenomenon” emerged during elections in Poland, Bulgaria, South 
Korea, and Italy. 

The secret, it appears, is leaking out. Given the contemporary 
political economy of mass communications, when the show becomes 
unbearable to many in the audience, the time is ripe for a special 
guest appearance from The Sponsor. What historically could be 
dismissed as a fantastic projection of the investment approach to 
analyzing politics is now cold, sober reality: A single super-rich 
investor can create a “party” of his or her own and bypass the 
antique trappings of mass political parties altogether. 

Such candidacies, of course, are largely unintelligible if examined 
only from the mass political side. Absent more, and more searching, 
survey evidence than is publicly available as this essay goes to press, 
there is little to do save underscore what the 1992 race made 
obvious: that significant portions of the electorate are deeply anxious 
about the future and dismayed with conventional politics. Here, as in 
so many other cases in 1992, real answers to most of the interesting 
questions—why Perot, a public supporter of Richard Nixon, Reagan, 

and other generally conservative political figures, split so noisily from 
the Republicans; why he so evidently disliked Bush; and why he was 
so determined to run a campaign independent of both parties—come 
only from a careful analysis of the byzantine intersections between 
business and American politics. 


In Perot’s case, this requires a major research effort, for whatever the 
media stereotypes, the Texan is no cardboard cutout. He is a very 
complex figure whose thinking has clearly evolved over time and 
defies summary classification. Though his single-minded focus on the 
deficit in what must perforce be styled his “second coming” often 
made it difficult to see, Perot in his public statements over the last 
decade had begun to elaborate a serious if, in my opinion, 
incomplete, critique of American economic policy and practice. In 
contrast to both Bush and Clinton, he was willing to tackle the 
sovereign reality of American life today—the fact, manifested most 
strikingly in the divorce of top management compensation from 
corporate performance, of persisting and pervasive mismanagement 
in the private sector. Unlike the “free market” ideologues who 
dominated the Bush administration (and, with certain qualifications 
that should now be evident, control policy in the Clinton 
administration), Perot was prepared to look seriously at the 
“organized capitalism” of Japan or West Germany for ideas on how 
to restructure the American economy. Virtually alone among major 
figures in the U.S. business community, he was also prepared to 
break publicly with the free trade orthodoxy that has dominated 
American public policy since the New Deal once he became 
convinced that headlong pursuit of that ideal placed the domestic 
American economy at risk. That dangers attach to such efforts goes 
without saying; nor, it should hardly be necessary to add, does it 
follow that Perot was the ideal person for the job even if he offered 
more to think about on such issues than anyone else. 

The Texan’s inchoate and incomplete views about how to 
restructure the U.S. economy developed out of his experiences as a 
major innovator in the computer service and software industry. (His 
one conspicuous failure came in the early seventies, on Wall Street.) 
His earliest ideas focused on internal business organization. His 
thinking, however, was radicalized by his experiences on the front 

lines of the declining American empire—once in Iran, in 1979; and 
then again at General Motors in the mid-1980s. This GM encounter, 
in turn, intersected fatefully with a dark legacy of that greatest of all 
cases of imperial overextension, the war in Vietnam: specifically, the 
question of whether American prisoners of war had been left behind 
in Indochina. As Perot became increasingly involved in the uniquely 
acrimonious prisoner of war/missing in action (POW/MIA) issue, he 
became far more critical of Republican economic policies. The 
accumulating tensions led the Texan to become increasing dissatisfied 
with the structure of decisionmaking in the U.S. national security 
state. Eventually a bitter personal breach developed between Perot 
and Bush, whom the Texas billionaire clearly regarded as the 
incarnation of cautious bureaucratic managerialism. 


Seeing all this, of course, requires attention to topics that analysts of 
American elections rarely bother with. It also demands a clear-sighted 
acknowledgment of Perot’s formidable business skills. Though these 
clearly impressed many voters, there were certainly many who 
scoffed during the campaign at the “welfare billionaire.” But this 
charge is just close enough to the truth to be seriously misleading. 

Despite tunnelling through a mass of documents and studies from 
the late sixties and early seventies, I have not been able to pin down 
the average costs of Electronic Data Systems, Perot’s company, 
compared to the rest of its industry.— But the broad pattern is clear 
and all too familiar. A market innovator really does build a better 
mousetrap, which (until rivals catch up—a process that often takes 
much longer than orthodox economic theory wants to recognize) 
allows him (or rarely, her) to catch mice far more cheaply and 
efficiently than anyone else. As a result, he can consistently underbid 
competitors while still making vast profits and retaining the goodwill 
of customers, who are delighted to watch dead mice pile up while 
paying less. In due course the whole begins adding up to more than 
the sum of the parts, as overhead costs (like politics and lobbying) are 
spread over the growing volume of business, and other economies of 
scale emerge. 

In the ideal world where dedicated state managers had both the 
knowledge and the motivation to adjust contract specifications to 
firms’ real costs, the state could recapture some of these profits for 

taxpayers by altering the bidding process, perhaps after a decent 
interval to reward innovation. But neither we nor Perot live in an 
ideal world. 

The widely touted organization of work at EDS was clearly related 
to the nature of its product. The company did not sell hardware— 
that was IBM’s territory. Instead, building on his knowledge that 
most IBM customers had only very hazy ideas about what the great 
whirring machines could really do, Perot formed a software and 
service company that could teach them or, ideally, do the work for 

Here he ran into a classic problem: how to motivate and monitor 
the workforce. The nature of work in computer services does not 
easily lend itself to any of the classic solutions to these dilemmas. Pay 
by piece, for example, rarely makes sense, nor does a flat wage 
always suffice to inspire the sustained application required over long 
periods. Perot’s solution, which other parts of American industry are 
now experimenting with as they confront the broader crisis in work 
relations, produced the better mousetrap. Essentially, he made 
individual financial rewards dependent on the firm’s success as a 
whole, tying total compensation to the stock price. 

Trying to make a virtue out of his inability to measure individual 
output very reliably (this is the real point about all the stories of the 
fabulously long working hours, night shifts, etc., that characterized 
life at EDS), Perot also heavily stressed teamwork and joint activity. 
Investing heavily in worker training (an investment Perot sought to 
protect by having workers who left the firm commit to repaying), 
EDS consciously sought to envelop its employees in a thoroughgoing 
firm “culture” or “ideology.” (This is the principal reason Perot was 
always hiring ex-military types, I think, rather than any attempt to 
build up a private covert activity capacity, though his affinity for 
covert action is obvious.)— 

In the early seventies, a wave of investigations and bad publicity hit 
EDS, but the obituaries for both Perot and EDS were premature. 
Initially Perot tried expanding overseas. First he won a contract with 
the Saudis to set up an urgently needed data processing system for a 
new university on a crash basis. Then came the famous contract with 
Iran, reputedly one of the largest computer contracts ever. While this 
experience led Perot to pull back temporarily from the international 
arena, the domestic end of the business thrived. EDS continued to 
win government contracts, but it also gained substantial business 

from private firms. Perot’s detractors sometimes attribute the EDS 
revival to Morton Meyerson, whom Perot had put in day-to-day 
charge of the firm. If one credits this analysis, then, in the spirit of the 
business historians who hailed Pierre DuPont as a business genius 
because he hired Alfred P. Sloan to run General Motors, the only 
sensible response is to ask who hired Meyerson. 

Eventually, of course. General Motors acquired EDS and 
inadvertently provided Perot with a lesson no business school ever 
teaches about behavior at the top of the American corporate 
hierarchy. GM was seeking to diversify, but also to revitalize itself in 
the face of persistent losses of market share to rivals, especially the 
Japanese. The prospect of turning around the most conspicuous 
example of America’s economic decline clearly fired Perot’s 
imagination. Soon after going on the GM board, he began poking 
among the dealerships, talking to the UAW (becoming appalled at 
GM’s labor relations) and talking excitedly about eventually 
exporting cars to Japan. 

Quickly, however, the merger soured. Perot and GM Chief 
Executive Officer Roger Smith battled constantly over how EDS and 
GM would relate to each other, and the auto giant’s management 
resented Perot’s efforts to turn the company around. Though Perot 
has been much criticized for his tactics, the plain fact is that he was 
basically right, and usually was the only person on the GM board 
willing to rock the sinking boat. After all, the Japanese were selling 
millions of cars in the United States. But after more than twenty-five 
years of steady Japanese inroads, GM still could not make a car that 
was as good or nearly as cheap. 

Perot, who in other contexts has referred scornfully to the impact 
on the workforce of low educational standards and easily available 
drugs, did not shrink from pointing the finger at the decisive fact 
about the decline of the auto industry in America: that for all the 
noise about unions or the decline of the work ethic, plenary 
responsibility for the shrinkage of the industry obviously lay with 
management. As he remarked in 1987, 

We have unfairly blamed the American worker for the poor quality of our products. 
The unsatisfactory quality and appearance of many of our products is the result of 
poor design and engineering—not poor assembly. ... If you take a car made in Japan 
by Japanese workers and place it alongside a Japanese car made in a U.S. plant by U.S. 
workers (led by Japanese executives) there is no difference in quality. The Honda cars 
made in this country by U.S. workers are of such high quality that Honda intends to 
export them. 

Obviously the American worker is not the problem. The problem is failure of 

Zeroing in on the institutional structure that sustained this 
destructive pattern, Perot became one of the first to discuss corporate 
America’s best-kept secret: that when corporations function 
efficiently and deliver products people want at a price they can 
afford, they make large profits, out of which the management is 
handsomely rewarded. But when they don’t function efficiently, 
produce junk that few people want to buy, and end up garnering only 
small profits or even run at a loss for long periods, principally the 
workers, and secondarily, the shareholders, pay the price: Corporate 
compensation, voted on by interlocking directorates whose members 
rely on each other not to make waves, rises anyway, while the plants 
go overseas and shareholders fret. As Perot observed in a famous 
speech to the Economic Club of Detroit a few days after exiting the 
company, “If you go to war, you feed the troops before you feed the 
officers. You can’t look the troops in the eye and say, ‘It’s been a bad 
year, we can’t do anything for you,’ but then say, ‘By the way, we’re 
going to pay ourselves a $1 million bonus.’” - 

The climax of the struggle between GM and Perot came in the fight 
over the acquisition of Hughes Aircraft. Perot opposed it, warning 
that the firm was too dependent on a few large defense contracts. 
While time has vindicated his judgment, the board was not interested. 
Some accounts actually claim that no one said a word in response to 
Perot’s carefully prepared objections.— A year later GM greenmailed 
him out of the firm for $700 million. Perot took it, after publicly 
giving GM time to withdraw an offer that both Jesse Jackson and T. 
Boone Pickens denounced, for different reasons. 

His criticism of GM led the press to declare Perot a “populist.” Of 
course, comparisons to the old Farmers’ Alliance are silly, but Perot’s 
economic and political views were beginning to evolve in strikingly 
unorthodox directions that would have major ramifications in 1992. 

If EDS taught Perot about innovation and work relations, Iran 
taught him about the limits of the American government abroad, and 
GM taught him about inefficiency and the crisis in corporate 
management, then it was Perot’s particular position in the Texas 
business class that encouraged him to breach the limits of laissez 
faire. In the early ’80s, Perot was part of a group of Texas 
businessmen who wanted to diversify the state away from its 

traditional reliance on oil and into high technology, computers, 
biotechnology and other science-based industries. This group—whose 
members could be found in both parties, so that it could by turns be 
reasonably denominated as bipartisan, independent, or nonpartisan— 
can fairly be described as very conservative in regard to basic 
property relations. But it cannot sensibly be characterized as 
reactionary. Well aware of projections that Texas would eventually 
have a majority of non-Anglos, Perot and other members of this 
group were strong patrons of, for example, Henry Cisneros, then 
mayor of San Antonio and now Clinton’s secretary of housing and 
urban development. Though scarcely champions of affirmative action 
in any of that protean term’s common senses, many, including Perot, 
also strongly supported minority businesses and flatly opposed 
(overt) racial discrimination. They also accepted at least in principle 
the hiring and sometimes the promotion of women. 

It can be said of this group of Texas business leaders that like their 
fathers and grandfathers before them, while they preached free 
enterprise, they practiced “creative federalism”—the highly political 
project of using state power to create not only economic 
infrastructure, but also to provide start-up capital for especially risky 

But this facile judgment masks a subtle new influence of the 
contemporary industrial structure on politics. As already observed, 
the computer industry—really a congeries of several different 
industries—is thoroughly multinational. The number of alliances 
across national borders is increasing rapidly and muddying the whole 
question of national identities. At the same time, government 
intervention (and in many countries, deliberate targeting) is truly 
massive, so traditional free-enterprise, free-trade rhetoric is simply 
too hollow to sustain. 

The service and software ends of the industry, Perot’s niche, face in 
addition a special problem in international trade: while it is perfectly 
possible to process data for a shah, big contracts abroad often 
depend on political standing and thus, like it or not, on the U.S. 
government’s ability to exert influence. 

It is also possible to write software and sell services in countries 
whose language is not English—but here even the most dedicated 
group of monoglot ex-marines confronts a real obstacle as it faces off 
with the locals. It is therefore unsurprising that all over the United 
States, software and computer service firms show up in the vanguard 

of campaigns to shore up the economy (through at least the minimal 
move of promoting education) and preserve the position of U.S.- 
based production in the world economy, which is closely bound up 
with the viability of English as the world’s universal second language. 

So it makes sense that in Texas, Perot was a leader in the effort 
that brought the Microelectronics and Computer Technology Corp. 
(MCC) to Austin. And that Meyerson, who now runs Perot Systems 
and who helped direct Perot’s presidential campaign, served for a 
time as chair of the support committee for the superconducting 
supercollider, and that when he stepped down, he was succeeded by 
Tom Luce, Perot’s longtime attorney, and another principal figure in 
the presidential campaign. And that a host of Perot philanthropies, 
such as his vast gifts for biomedical research at the University of 
Texas Southwestern Medical Center at Dallas, fit clearly into this 
long-term project. (Many of these benefactions come with various 
strings attached, a pattern of doing good and doing well that marks 
U.S. business as a whole). 

Perot’s most celebrated political initiatives from the early 1980s— 
the Texas war on drugs, which he declared more or less unilaterally 
following his appointment to a state commission that was expected 
to do very little; and the remarkable campaign he waged in favor of 
improving education (and, if necessary, raising taxes to pay for it)— 
are most easily understood against the background of Perot’s 
professional interest in American stability and competitiveness and 
his growing anxiety about the direction of public policy.— 

By the mid-1980s, Perot was generalizing his software experience 
into a broad approach to industrial renewal. In a series of speeches 
that were completely ignored by analysts in the 1992 campaign, he 
laid out a vision of a U.S. economy transformed by the intelligent use 
of computers to replace middle management, restructure work, 
improve industrial design, and restore manufacturing. 

His GM experience, however, dashed these hopes for swift success. 
Though many analysts have ruefully observed how American 
companies, especially in management and the broader service sector, 
have astoundingly little to show for their massive investments in 
office automation, Perot was clearly surprised when he ran into a 
brick wall of entrenched management and long-established social 
relations. In sharp contrast to most critics, however (who, in the case 
of at least one well known business critic of corporate compensation 
trends, have had columns canceled by magazines after corporate 

advertisers complained), Perot was a billionaire.— The world’s most 
affluent mouse decided to roar. 


At the very moment Perot began to step forward as a critic of 
corporate America, however, he was sliding into another controversy 
that would eventually put him—the famous champion of America’s 
armed services—on a collision course with virtually the whole 
national security and foreign policy establishment. Because in the 
1992 campaign, the press repeatedly failed to ask certain very simple 
questions and instead published a selectively leaked “official story,” 
this fateful episode has never emerged clearly.— It can now, however, 
be treated with some precision thanks to a striking new document 
made public late in the campaign to virtually no publicity. This is the 
sworn deposition Perot gave to Massachusetts Senator John Kerry’s 
Select Committee on POW/MIA Affairs after he famously refused to 
testify in public before it in June of 1992.— 

At issue is the long dispute over whether the American government 
left prisoners behind in Indochina in 1973. Since this question is 
uniquely inflammable, some advance disclaimers are in order. I 
myself have always regarded reports of POW sightings as on par with 
the many apparitions of Elvis, save that in the latter case no powerful 
organized interests have encouraged and circulated the claims for 
clearly political ends. With some qualifications that will momentarily 
become apparent, this remains my view: no substantial numbers of 
U.S. troops were left behind in Vietnam in 1973. But to come to grips 
with the Bush-Perot clash one has to make a deliberate effort to see 
the world as it is seen by others who start from different premises 
and view the evidence differently. 

Many sighting reports were (and are) in complete good faith. 
Though a fair number of charlatans—and penniless refugees 
dependent on official U.S. goodwill—have clearly moved into what 
quickly became an attractively remunerative field, there is no point in 
impugning the motives of most people who believe they saw, or 
heard, American POWs in Southeast Asia. Any number of Americans 
are likely to turn up in Indochina for perfectly comprehensible 
reasons. Not only was the wartime desertion rate phenomenal, but 
the United States waged a long, secret war in Laos that it generally 
refused to acknowledge. Though American prisoners in Laos were 

supposed to be turned over in the wake of the 1973 accords, both the 
United States and the Vietnamese pretended that the Pathet Lao was 
not officially party to the accord—as indeed, formally it was not. 

Though U.S. pilots who came down in Laos were rescued at higher 
rates than those shot down over North Vietnam, the question of 
prisoners taken in that pre-1973 secret war on the ground is murky. 
Judging from a much-quoted but very cryptic remark by General 
Vernon Walters, some American covert forces may also have been 
captured in Cambodia. And a wide variety of governmental and 
private missions have operated on the ground since. Adding to the 
turmoil, Chinese intelligence is widely believed to have promoted 
reports of prisoner sightings to prevent a rapprochement between the 
United States and Vietnam, with which China has been intermittently 
at war.— 

The recent hearings before the Kerry committee clouded this 
already turbid picture still more. Some stunning testimony indicated 
that American officials suspected back in 1973 that some prisoners 
might be missing, but did not want to talk about it. (It should be 
borne in mind that a host of perfectly sensible reasons exist for the 
discrepancies between reported captures and actual apprehensions 
and that the number of people unaccounted for in Vietnam was 
usually low compared to other conflicts. The U.S. government has 
also deliberately and repeatedly run together the inevitably large 
number of MIAs whose demise are virtually certain, but who fail the 
stringent requirements for being officially reported as killed in 
combat, with POWs, thus grossly inflating the number of potential 

A particularly striking portion of the testimony in June 1992 helps 
illuminate Perot’s views about the controversy. The interlocutors are 
committee Chair Kerry and Roger Shields, formerly a Pentagon 
official in charge of the Nixon administration’s efforts to account for 

THE CHAIRMAN: YOU recall going to see [then Deputy] Secretary of Defense 

William Clements in his office in early April [1973] . . . correct? 

DR. SHIELDS: That’s correct. 

THE CHAIRMAN: And you heard him tell you, quote, all the American POWs are 

dead. And you said to him, you cannot say that. 

DR. SHIELDS: That’s correct. 

THE CHAIRMAN: And he repeated to you, you did not hear me. They are all dead. 

DR. SHIELDS: That’s essentially correct.— 

The Kerry committee’s efforts have produced a flood of new 
documents indicating that, for years, the government was shockingly 
uninterested in pursuing any evidence that did stray in. Indeed, 
officials were actively discouraging such investigation. For example, 
one previously classified memorandum by a naval officer in charge of 
the Pentagon’s investigation in the mid-1980s (Thomas A. Brooks, 
who retired as a rear admiral) spoke of “a mindset to debunk” POW 
reports, along with a basic failure to employ “some of the most basic 
analytic tools such as plotting all sightings on a map to look for 
patterns, concentrations, etc.”— 

It should now be easy to understand the rage that built up in 
relatives of the MIAs, government officials, military personnel, and 
reporters who tried to take these reports seriously. Those who 
persisted were ridiculed, retired, passed over for promotion, etc. If 
they were reporters—even an Emmy Award-winning reporter for 
CBS’s Sixty Minutes like Monika Jensen-Stevenson, or her husband 
William Stevenson, author of the well-known A Man Called Intrepid 
—they were harassed, intimidated, and rebuffed by various 
government officials. In the case of Jensen-Stevenson and her 
husband, a copy of their unpublished manuscript (eventually 
published as Kiss The Boys Goodbye) somehow ended up in the 
government’s hands. Nor is it surprising that reporters like the 
Stevensons—whose honesty in reporting what they themselves saw 
and heard I do not doubt, although, as I have indicated, I weigh the 
evidence about POWs rather differently—eventually began talking to 
America’s most famous champion of the Vietnam POWs, Ross 

Perot himself, according to his recently released deposition, had 
long been persuaded that the United States had left prisoners behind 
in Laos and perhaps Cambodia. But whatever his private suspicions, 
for a long time his public posture reflected skepticism. In 1981, for 
example, when a Perot encounter with one adventurer who claimed 
knowledge of POWs briefly made news, Perot’s spokesperson 
emphasized that, while “deeply interested in the subject,” Perot 
“doesn’t believe there are any MIAs or POWs left back in the bush or 
in the jungle camps.” He added: “We went through this issue in the 
1970s and were satisfied in our minds that there were no more 
Americans over there.”— 

Though in the deposition Perot testified that the question never 
directly came up between them, it is of more than passing interest to 

note that on the board of EDS shortly before its sale to General 
Motors was the very same William Clements (then between terms as 
governor of Texas) whose role in defining the official U.S. position 
we have just examined. 

Eventually, however, the long wagon train of skeptics alleging the 
government’s bad faith appears to have moved Perot. In the mid- 
1980s, he began to raise the issue with Reagan administration 
officials. (For part of the ’80s, Perot served on the president’s Foreign 
Intelligence Advisory Board, which required a high-level security 

In his deposition, Perot related how then Vice President Bush 
phoned him one day in early 1986 to ask his assistance in obtaining a 
tape that was said to show American prisoners held captive 
somewhere in Indochina. The tape was said to be in possession of 
someone then held in jail in Singapore, who was asking $4.2 million 
for it. According to Perot’s sworn testimony, Bush asked him to buy 
it and promised that if the tape proved to be authentic the 
government would reimburse the Texan. Later, however, as Perot 
was about to strike a deal, Donald Gregg from Bush’s staff allegedly 
called to say that policy had changed and that Perot would not be 
reimbursed. When Perot persisted, federal agents attempted to 
apprehend the man claiming to have the tape upon his arrival in the 
United States.— 

Perot also testified that in the late spring of that same year, he tried 
to persuade Bush to reconsider the government’s handling of the so- 
called “Tighe Report.” This was an inquiry headed by an Army 
general into the POW situation that top officials sought to soft-pedal, 
and then ordered classified. When he learned that officials were 
planning a briefing for reporters at which Lt. General Eugene Tighe 
would not be present, Perot protested. Eventually he went to Bush, 
who, according to Perot, decided to do nothing.— 

The apparently arbitrary handling of the “Tighe Report” created 
waves in the small enclosed world of those in a position to know 
about it. Soon afterward, Perot was approached about making one 
last, final search through the files to close the issue. Perot, according 
to his deposition, accepted after receiving personal assurances of full 
cooperation and access to the files from both President Reagan and 
Vice President Bush. Perot testified, however, that not all records 
turned out to be open.— Nevertheless, in the fall of 1986, Perot 
personally—no one else had the requisite security clearances—spent 

vast amounts of time in Washington, poring over files. 

Though reliable evidence is scanty, his investigation appears to 
have stirred up a hornet’s nest. In Kiss The Boys Goodbye , Jensen- 
Stevenson and her husband report that Perot, the investigator, was 
himself being investigated by someone during a trip to Washington to 
gather and review evidence.— For this telling detail, one must accept 
the Stevensons’ word, since other sources are not talking. But other 
facts they supplied to a Nation researcher who contacted them (at my 
suggestion) in Bangkok during the summer of 1992 check out. 

The Stevensons are the most specific and detailed, but no longer 
the only, source for what seems to have happened next. As the 
struggle over GM raged, Perot, the man who identified drugs with 
American economic decline and had spent vast sums of money 
fighting the scourge in Texas, came upon something unexpected in 
his POW investigation: drugs. As most reliably documented by 
University of Wisconsin historian Alfred McCoy (whose work, upon 
its publication twenty years ago, became the object of a disgraceful 
official disinformation campaign, and which has recently been revised 
and updated as The Politics of Heroin: CIA Complicity in the Global 
Drug Trade), some American intelligence officials appear to have 
long been involved with the drug trade. Others have assuredly 
tolerated it for a variety of “national security” reasons.— 

The Stevensons relate what happened when Vice President Bush 
inquired how Perot’s inquiry was going: 

“Well, George, I go in looking for prisoners,” said Perot, “but I spend all my time 
discovering the government has been moving drugs around the world and is involved 
in illegal arms deals. ... I can’t get at the prisoners because of the corruption among 

our own covert people.”— 

The deposition tells essentially the same story, under oath: 

Q[uestion to Perot by the Committee Counsel]. You are quoted in that book as having 
said: Every time I look for POWs, I bump into CIA agents running guns or drugs or 
words to that effect. Do you recall ever making a statement like that? 

A[nswer by Perot]. Not that exact statement, no. I basically said as you do a study all 
these things keep popping up unsolicited—just like this one. 

Q. To whom did you make that statement? 

A. To the lady writing the book. 

Q. Did you make a statement to that effect to George Bush? 

A. Again, yes, I did make that statement to him. 

Q. Was that in a face— 

A. I don’t remember the date. Yes.— 

In early 1987, an obviously unhappy Perot gave a public interview 
to Barron’s. There he poured out his frustration over GM, takeovers, 
and the stock market (which, months before the October crash, he 
insisted had lost touch with reality). He also, however, made one 
striking observation that should have led someone in the press to 

There are things going on in Washington around this whole Iran arms deal-[C]ontra 
thing. We should have been able to see that coming. . . . long before Reagan was even 
in the White House. ... It is the same team of beautiful people selling arms around the 
world. This is not a new experience for them to be selling arms at a profit. I mean, 
some of them got caught once, in Australia [a reference to the collapse of the Nugan 
Hand Bank, which led to a major investigation by the Australian government]. They 
got caught again in Hawaii. Edwin Wilson got put in jail. And if you go back and 
follow the trail, these guys have been working together since the Bay of Pigs. And yet 

now, suddenly, it is all coming into focus. And we will clean it up.— 

But the bulk of the press did not inquire. Soon thereafter, Perot— 
now out of GM—embarked on his celebrated trip to Vietnam and 
pursued a lengthy battle with Richard Armitage, a longtime Pentagon 
official.— He also gave a few speeches that suggested to some 
onlookers that he was weighing a (1988) presidential bid of his own. 
But of course, he did not run—then. 


From the standpoint of an investment theory of party competition, 
the two Perot campaigns of 1992 are a milestone in the history of 
American political parties: It is perfectly obvious who paid for them 
and who ran them at every moment in time. Nevertheless, the social 
organization of the campaigns differed considerably, in ways that 
may still matter for American politics. 

I am inclined to accept the story that not even Perot’s immediate 
family anticipated his February 20, 1992, bombshell on the Larry 
King Show that he would consider running. But whatever Perot was 

thinking or saying before then, it is a fact that in late 1991, as George 
Bush sank lower and lower in the polls, Perot was making the rounds 
at rallies sponsored by groups protesting the congressional pay raise 
and, commonly, higher taxes. Perhaps the best known of these efforts 
was one organized by Jack Gargan, a Florida retiree, called THRO— 
Throw the Hypocritical Rascals Out.— Though Perot himself had 
several times advocated raising taxes, the response to his polished, 
well-delivered speeches at these gatherings was enthusiastic. 
Encouragement to run was also coming from other quarters, 
including a handful of business-oriented Southern Democrats 
previously known for various “populist” noises (as the much more 
mainstream DLC assuredly is not). - 

Perot’s decision to become an undeclared candidate generated 
widespread excitement. What appear to have been quite genuine 
grassroots campaign vehicles sprang up around the United States 
(though mostly outside the deep South). Crowds were big, mostly 
enthusiastic, and, it may be worth underscoring, quite orderly and 
respectful, with no trace of paramilitary stirrings. 

Early polls suggested that Perot’s appeal cut across the normal 
political spectrum, but fell off sharply among poorer Americans. 
Women, African-Americans and Jews tended to be skeptics. But the 
polls also suggest that next to either Bush or Clinton, the plainspoken 
Perot looked larger than life. By projecting an image of forceful 
initiative—and after the Los Angeles riots, when Perot was the only 
candidate who immediately criticized both the verdict and the 
president, the reality of forceful initiative—he appears to have 
diminished the aura of “leadership” that, however irrationally, clung 
to Bush after the Gulf War. By explaining in simple terms how the 
Reagan-Bush policies were damaging the economy, Perot also 
probably increased popular interest in the race. He also surely altered 
the terms of the debate between the major parties by vigorously 
attacking Bush at a time when Clinton looked weak indeed, and, as 
he withdrew, by backhandedly endorsing Clinton and the “new 
Democrats’” efforts to dramatize themselves as fresh, forward- 
oriented moderates.— 

To most Americans, however, Perot himself was an unknown 
quantity. Though I know of no poll that ever inquired, I suspect that 
a fair number of voters initially confused him with one of his Dallas 
neighbors from the Hunt family. Coupled with the Texan’s almost 
insouciant dismissals of details, which in fact differed little from 

Bush’s or Clinton’s airy generalities, but inevitably attracted more 
notice, this “blank slate” aspect to his candidacy implied that his 
public image was weakly anchored. 

Eventually the White House, the Democrats, and Perot’s foes in the 
media found this weakness and moved to exploit it. A series of 
selective leaks keyed to his scheduled appearance before the Kerry 
committee at the end of June sent his negative ratings soaring. Perot, 
whose commitment to racial equality (under free enterprise) is clear- 
cut and long-standing, also blundered badly in a famous address to 
the NAACP by appearing to patronize his audience. Because similar 
“dirty tricks” are now well attested to, I must say that I do not doubt 
Perot’s testimony that Republican campaign operatives may also have 
been contemplating appalling schemes to embarrass him.— 

As the second campaign proved, the damage to his image could 
have been repaired, given money and time. But while Perot did not 
lack for the first, in the early summer the second was becoming 
scarce indeed. 

As far back as the Nixon period, Perot had fiercely resisted 
assimilation into conventional political labels.— His 1992 effort was 
entirely in this spirit. But if one looks closely, Perot, who scorned 
both political parties in the campaign, had in fact been carefully 
waging a struggle that was less antipartisan than bipartisan. What 
was clearly emerging as a “Noah’s Ark” strategy of deliberate, 
simultaneous bridge building to both left and right aimed to balance 
off Republican endorsements with Democratic pledges of allegiance, 
overtures to one side with openings to the other, and so forth. Most 
obviously visible in the famously nonidentical twins he hired to 
advise (they thought: “run”) his campaign—Ed Rollins and Hamilton 
Jordan—such tactics were in fact the campaign’s hallmark. 

The problem, which was acute by the time of the Democratic 
convention, was that the strategy was failing. Some business figures 
with fairly clear associations with the Democrats made widely touted 
moves in Perot’s direction: A. C. Greenberg of Bear, Stearns; Felix 
Rohatyn (who was very coy about whether he would actually 
support the Democratic ticket); Richard Fisher (whose praises as 
Perot’s foreign policy coordinator were sung by no less than Robert 
Hormats of Goldman, Sachs); and Thomas Barr of Cravath, Swaine 
and Moore. Lee Iacocca and Mortimer Zuckerman, who reportedly 
were talking up the Texan, might also qualify under this rubric. 

But most, though not all, of these figures had past ties to Perot. 

Rohatyn formerly sat on the board of EDS; Fisher had married into a 
prominent Dallas family with Perot in attendance; Greenberg was 
another outspoken and longtime admirer of the Texan. Cravath 
represented Perot.— 

Other nationally prominent Democratic leaders with valuable 
organizational ties hung back: Jackson, with whom Perot had been 
involved before in foreign policy ventures and the GM affair; several 
union leaders; Boston Mayor Raymond Flynn; and various other 
liberal Democrats. Just before the Democratic convention, Perot had 
an extended conversation with Tsongas. Their meeting produced 
praise for Perot from the former Massachusetts senator, but no 

In sharp contrast, supply-side Republicans disenchanted with Bush 
flocked to Perot’s standard, including Theodore Forstmann and 
Wanniski (who was touting a sharp rise in the Dow Jones industrial 
average if Perot won). Rollins also hinted broadly that a number of 
former top Reagan advisers were only awaiting the proper moment 
to make an endorsement. 

That the campaign was striving to lift off the ground on only one 
wing was certainly responsible for much of the turbulence that 
rocked it in its final days. Judging from his public positions after he 
reentered the campaign, Perot was sympathetic to the supply-siders’ 
opinions on capital gains tax reduction, if not on the rest of their tax 
policy. He also assuredly agreed that gigantic spending cuts were 
required to balance the budget. 

On the other hand, his key insight into the need to make corporate 
managers responsible for corporate performance, though echoed in 
some recent “shareholder rights” proposals, is not an idea supply- 
siders promote, especially in public. Neither, obviously, are tax hikes 
and additional government investment in industries or infrastructure, 
not to mention the whole notion of “organized capitalism,” which 
clearly intrigued Perot. 

Nor were Perot’s stances in favor of allowing banks to take equity 
positions in other companies and opposing NAFTA positions that 
would endear him to supply-siders, though at the time some were 
confident that they could eventually turn him around on the trade 
issue. The supply-siders were correct, however, that Perot’s preferred 
forms of government intervention did not usually include tariffs as a 
first resort. In 1987, he had specifically cautioned against the penalty 
duties slapped on Toshiba. At several points in the campaign, he also 

declined to run against the Japanese when it would have been easy to 
pick up some of Buchanan’s support by doing so. Influenced by Pat 
Choate, a prominent critic of Japanese and other lobbying, however, 
when Perot promised to tighten laws on foreign lobbying, he 
undoubtedly meant it.— 

When another maverick billionaire, Howard Hughes, discovered 
the seaplane of his dreams, the famous Spruce Goose, couldn’t stay 
airborne for more than a few minutes, he flew it to a nearby dock. 
There he left it moored, never to fly again. Perot, whose comparative 
advantage as a leader rested on the creation of effective teams (as he 
said repeatedly to skeptical auditors nervous about his bull-in-a- 
china-shop reputation), and who for twenty-odd years had aspired to 
reach out beyond a single party, was now coming to grips with the 
fact that society is not like a firm, which can recruit selectively. 

No doubt all these factors weighed heavily on Perot. As he 
prepared to release an economic plan calling for draconian (and in 
my judgment, quite uncalled-for) budget cuts and contemplated a 
fledgling political movement that was maturing with only one wing, 
but that would still drain off at least $90 million more in campaign 
expenses, it is easy to understand why he decided to park his Spruce 
Goose and walk away. 

But Perot was not, in fact, another Howard Hughes. His reentry 
into the race—with his poll ratings in single digits and amid all sorts 
of assurances from any number of the conventionally acclaimed “best 
and the brightest” pundits that “third parties always fade”—began 
one of the most remarkable comebacks in American political history. 
He was probably the winner of two of the three debates,— and was a 
striking innovator in campaign techniques. (His celebrated 
“infomercials” sometimes placed higher in the ratings than the 
programs they replaced—in defiance of expert opinion on the mass 
public’s alleged lack of interest in technical economics and details of 
public policy.) He even survived another bout with CBS News in the 
last week of the campaign.— By election night, he had turned around 
his favorable/unfavorable ratings even with many people who had 
decided not to vote for him—a warning, perhaps, against taking any 
of his poll ratings since the election too seriously. 


As a political coalition, the new Clinton administration rather 

strikingly resembles the Seattle Space Needle. At the top are well- 
appointed, indeed luxurious, quarters nominally open to all, but in 
fact occupied by those who can afford them. (Though exactly what 
its figures refer to is not clear, the Associated Press claims that there 
are more millionaires among Clinton’s top advisers than among 
Reagan’s or Bush’s.)— Below the glittering top rungs, however, the 
supporting structure is almost terrifyingly skimpy. Only a modern 
marvel of political engineering sustains it. 

Within the business community, the Clinton base essentially 
consists of the relatively small group of firms that are prepared to 
experiment with slightly wider definitions of the role of the state and 
that are prepared to pay very modestly to see this happen. Alongside 
these firms, whose personnel directly control most of the levers of 
economic policy in the administration,— are grouped the remnants of 
the now heavily subsidized official labor movement, and the various 
constituency organizations that the Democrats have cultivated over 
the last couple of decades. The electoral foundation, as many have 
noted, is exiguous: Clinton was elected with just 43 percent of the 
total vote—the third-lowest winning total since 1828, when 
something like a modern system of presidential selection began 
evolving. Another way of putting the point is even more revealing: In 
terms of the winning candidate’s percentage of the total potential 
electorate (i.e., including nonvoters), 1992 ranks at the very bottom, 
along with the election of 1912.— 

Though no one should have been surprised, it is clear that the new 
regime’s repeated stumbles in its first hundred days caught off guard 
both the public and most political commentators. Indeed, this shock 
was so severe (polls on the eve of the inauguration suggested that the 
public’s hopes were soaring, with optimism among African- 
Americans at record levels) that the full meaning of what has 
happened probably has yet to sink in.- 

Now that the administration has succeeded in getting a budget 
through and has at least temporarily stabilized itself, one must 
wonder about the future. Put bluntly: Can the Clinton administration 

The answer, I think, depends on precisely what one means by 
“recover.” As the introduction to this book indicated, the 
administration may well succeed in muddling through until 1996 
without suffering a fatal policy reversal at home or a disaster abroad. 

In the event its efforts to reform health care are crowned with 
suceess, it could even regain some of its lost luster. As long as its 
opposition remains divided (i.e, if the balance among Republicans, 
the followers of Perot, disaffected Democrats of various stripes, and 
the millions of nonvoters remains about where it was in the fall of 
1992), then a strong political business cycle—which will require 
considerable help, witting or unwitting, from abroad—might suffice 
to pull the president narrowly through again. 

But if by “recover” one means anything else, I fear the answer is 
not encouraging. All signs suggest that the world economy’s long 
time of troubles is far from over, and that the U.S. political system, 
like that of so many other countries, is now slowly disintegrating. 
Amid the continuing turmoil, political infighting and leadership 
turnover are all but certain to increase. 

In his public speeches during the 1992 campaign, then-candidate 
Clinton indicated that he understood the critical point for fashioning 
policy responses: that the American economy’s fundamental 
problems relate to growth and productivity, and not simply to the 
deficit. But even then it was perfectly obvious that most of the 
investment bankers and other business figures lining up behind him 
remained committed partisans of the austerity policies the United 
States has pursued since the late seventies. And on numerous 
occasions, including some I witnessed firsthand, it was equally clear 
that—to put it charitably—the candidate or his spokespersons were 
carefully signalling elites that his public line was less a serious policy 
proposal than an aspiration. 

No sooner was he in office than the president threw his campaign 
caution to the winds and settled on deficit reduction as his number- 
one priority. Any thought of serious economic stimulus was 
abandoned. At the first sign of heavy weather, the administration 
stopped paying even lip service to the concept. 

Now that Clinton’s deficit reduction plan is in place, however, the 
American economy is locked into a disconcerting course. Bringing 
down the deficit implies a reduction, year by year, in the 
proportionate amount the government spends over and above what it 
receives in revenues. While in theory total government spending 
could rise anyway as taxes go up even more, this interpretation of the 
president’s plan was a fantasy his opponents encouraged to whip up 
public opposition to the rise in taxes on the rich. In fact, spending by 
the government is slated to taper off significantly as a percentage of 

total GNP.^ 

Were the drop in government demand promptly offset by an 
expansion of demand from the private sector, there would be no 
problem. One could sit back and cheer on the invisible hand as it 
brushed aside America’s economic problems. But unfortunately, as 
the post-Keynesians among us have warned from the start, the 
invisible hand is now, in fact, mostly waving goodbye to vast 
numbers of ordinary Americans. Despite all the noise about how 
cutting the deficit is the key to restarting economic growth, this is 
simply not true. Cutting the deficit will for a time reduce interest 
rates. Consumers and businesses will, accordingly, borrow more. 
They will, therefore, spend more. And yes, this new spending will 
lead to some additional jobs and still further rounds of spending. But 
as California and many other parts of the United States are already 
discovering, total spending is unlikely to rise enough to offset the lost 
demand from government. The net effect of the Clinton budget 
package will be mildly contractionary: It will depress, not stimulate, 
the economy’s rate of growth, for years.— 

When he put forward his original deficit plan, Perot recognized 
this. Though the issue was never discussed in public, his scheme 
assumed a substantial fall in the dollar. Assuming world demand did 
not collapse—an “if” that is not unreasonable for a one-time-only 
development—the result would have been a rise in U.S. exports. This 
would have cushioned the big drop coming in government 
spending. - 

But as the opening of this paper observed, Clinton’s advisers, as 
they entered office, ruled out a devaluation of the dollar against the 
part of the world where the U.S. trade imbalances are most lopsided 
(Asia, aside from Japan, where they did encourage a sharp rise in the 
yen). Given what a falling dollar implies for dollar-denominated 
capital flows, the role investment bankers play in Clinton’s political 
coalition, and the fact that promoting a devaluation against the rest 
of Asia amounts to asking the many U.S. firms which have relocated 
production there to devalue against themselves, one can be confident 
that this policy will not be lightly discarded. 

This, however, leads to a problem: the United States has now 
embarked on a more equitable variant of Perot’s deficit plan, but not 
the devaluation that was integral to it. By itself, this implies a slower 
rate of economic growth than anyone but market professionals are 
now talking about in public. 

It also leaves the Clinton administration with several dilemmas to 
face in regard to economic policy. The most important of these 
involves the delicate question of relations with the Federal Reserve, 
whose chair, Greenspan, was of course appointed by the 
Republicans. Without Fed cooperation, there is no chance that the 
Clinton strategy of lowering long-term interest rates by “credible” 
deficit reduction can work. Both law and tradition, however, make 
the Fed notoriously refractory to presidential steering. To have any 
hope of getting his way, a president needs to mount subtle political 
campaigns over long periods of time while being very careful indeed 
about his own nominees to the board of governors. If anything is 
clear about the Clinton administration, however, it is that its 
processes for selecting and promoting nominees to all types of 
positions are near-fatally flawed by excessive caution and 
indecisiveness. This characteristic—which surely reflects the 
brittleness of its political backing as much or more than sloppy White 
House procedures—could prove very damaging indeed where the Fed 
is concerned. For the logic of the administration’s position implies 
that, in regard to macroeconomic policy, what financial markets 
want, financial markets should get. (If they are unenthusiastic about 
long-term prospects, the whole process of interest-rate reductions 
grinds to a halt, as cautious investors pull back from buying long¬ 
term bonds.) If in the White House there is no will to advance a 
distinctive policy, there is no way it can happen by default. 

Now an outstanding feature of contemporary financial markets is 
their almost Proustian sensitivity to the “specter” of inflation. It is 
therefore likely that long before the United States reaches anything 
approaching full employment, many parts of the financial community 
will be clamoring for the Fed to raise short-term rates to prevent 
“overheating.” This the administration should oppose, with at least 
as much energy and determination as, say, John F. Kennedy’s did in 
roughly similar circumstances.— Such a step, however, runs flatly 
against the main thrust of policy, so that it is hard to imagine the 
Clinton administration ever finding the courage—to say nothing of 
the political constituency—to do it. 

Nor is this the administration’s only problem with the Fed. Growth 
rates in the United States have been modest indeed for a long time. 
But outside of Asia and a few other developing countries, much of 
the rest of the world had frequently grown even more slowly. Though 
Europe will eventually start to grow again, it is improbable that the 

inflation-averse governments of Europe will suddenly become 
markedly less inflation-averse, or will cast aside their growing 
anxieties about their ratios of public debt to GNP. Accordingly, save 
perhaps in election years, their absorption of U.S. goods will be 
correspondingly reduced. Because of the overvaluation of the dollar 
and local trade restrictions, the more rapid pace of growth in Asia 
does rather less for the domestic U.S. economy than it does for the 
U.S. companies producing in the region. Depending on precisely what 
happens in Latin America—which certainly figures to absorb some 
U.S. exports—at times in the 1990s, as was true in much of the 
1980s, the slow-growing United States may still find itself sometimes 
wanting to grow faster than the rest of the world. Unlike in the 
eighties, however, the United States cannot go on running up 
enormous trade deficits. 

America can, of course, continue to finance its trade deficit by 
selling off not only financial, but real, assets. That option, however, 
is meeting increasingly stiff resistance in both the business community 
and the mass populace. Here, probably, is one more reason the 
administration, despite its public commitment to free trade, will find 
it convenient to manage trade with Asia, especially with Japan. - 
Because European markets are far more open to American firms than 
those of Asia, the administration is also likely to press the European 
Community to absorb still more U.S. exports—and in the process, to 
create still more trade friction. It will also try to shoehorn more 
American exports into what used to be called the Third World. 

But if the rest of the world does not grow fast enough, then the 
United States can grow only at the price of increasing its already 
ballooning trade deficit. Eventually, however, it may well run into the 
same wall that the Carter administration, and several British 
governments before it, collided with: as the trade deficit rises 
unsustainably, the dollar will weaken. At that point, the United States 
would be virtually back to where it was in the late seventies.— Yet 
another Democratic financier—named Volcker, or a clone—would 
take over as Fed chair again, with consequences for the mass public 
and the Democratic Party that require no further discussion. 

Long before this, however, the Fed and financial markets (well 
represented, of course, in the administration) would have called a 
halt to the “expansion” by raising rates. Or, in the happier version of 
the story that the administration is clearly hoping for, German 
interest rates will fall enough to restart growth in Europe, while the 

Japanese pursue some combination of rate cuts, market-opening 
initiatives, and fiscal stimulus, and Latin America expands smoothly. 
With the rest of the world growing again, the United States can keep 
on (slowly) expanding—though even here there is a risk that capital 
might begin fleeing a very slowly growing United States as other parts 
of the world take off, leading the Fed to hold rates up. 

Regardless of how well or how poorly international economic 
policy coordination goes among the G7, the administration faces 
another towering problem. As it has repeatedly observed, the deficit 
cannot be brought under control without reining in health-care costs. 

Here the problem is very large—and, in no small part, of the 
administration’s own making. Earlier, I noted the impressive support 
Bush garnered from much of the health industry. But while my 
statistical survey of contributions largely fails to catch them—because 
most of these firms are not large enough individually to qualify for 
inclusion in my sample—even a visual inspection of the FEC data 
indicate that one Democrat succeeded in attracting important 
contributions from parts of the health-care industry: Clinton.— 

As this essay goes to press, the administration is finally unveiling 
its long-awaited (and several times postponed) blueprint for 
overhauling the nation’s health-care delivery system. Already, 
however, some of the costs of this strategy—to strike deals with as 
much of the existing health-care industry as possible, instead of 
pushing for a simple and economical “single payer” (“Canadian 
style”) system—are plain. While the package of benefits and universal 
coverage the plan promises is carefully thought out and at least 
modestly appealing, the plan is fantastically complicated and not easy 
for ordinary voters to evaluate. The full costs of the network of 
oligopolies that the plan will create are being hidden, and savings are 
being claimed that are almost certainly not there.— The basic design 
is heavily weighted in the direction of the large insurers and several 
other parts of the health-care industry, including teaching hospitals. 
A few years down the pike the financing system proposed may well 
create strong pressures to curtail benefits or skimp on care. 

Because the current U.S. health-care “system” is so bad, many 
people, myself included, are likely to feel that the Clinton plan is 
nevertheless a marked improvement. But it is important to note the 
broad pattern of what is occurring: in the midst of an economic 
crisis, the United States is (perhaps) moving toward universal 
coverage within an extremely high-cost system that is certain to 

unleash fierce and highly political regulatory struggles among vested 
interests after it is up and running. 

The debate over the medical plan, perhaps, can serve as a 
metaphor for what is coming in the nineties. Here, as in so many 
other cases, a real “day of reckoning” may lie ahead. But this 
reckoning has less to do with discharging the modest burdens of the 
public debt than the tensions between voters and investors in the 
American electoral system. The plain fact is that the economy of the 
United States is failing an increasing percentage of its people. With 
slight differences (depending on the time period and precisely how 
one measures), hourly wages, total compensation (i.e., including 
benefits), and similar individual economic benchmark data have 
drifted down or even fallen steadily for almost two decades, even 
though productivity has slowly risen. 

This is definitely not because the American people are becoming 
lazy: for those lucky enough to have jobs, working hours have risen 
dramatically. Nevertheless, virtually every year another small 
percentage of the population slides out of the middle class, while the 
decline of public services, the pressures on families, and polarization 
of society continue.— Yet because political action is so fantastically 
expensive in the United States, not only elections but public 
deliberation itself follows the “Golden Rule”: those with the gold 
influence deliberations. Everyone else watches on TV. 

Not surprisingly, all this contributes to a public atmosphere of 
cynicism and mistrust accompanied by all sorts of pathological 
phenomena (crime, bizarre cults, exotic murders, etc.) as individuals 
break down one by one under the unrelieved stress. It also reduces 
politics to subsidized debates over third-, fourth-, or even fifth-best 
alternatives. Now that Ross Perot’s performance in the 1992 
campaign has at last let the great secret out—that, with enough 
money, candidates can pole vault over the whole rotting structure of 
party politics in America—it will be surprising indeed if the firm 
bipartisan consensus in favor of macro-economic austerity does not 
lead to what might be termed the “great compacting” of American 
public life and, perhaps, to considerable social turmoil.— 


For very helpful discussions on parts of this essay I am grateful to 
David Hale, Robert Johnson, Benjamin Page, and Alain Parguez. I 

should also like to thank Walter Dean Burnham for showing me a 
draft of his own manuscript on the 1992 election, and the members 
of seminars at York University, Toronto, and Swarthmore College, 
who patiently endured early versions of the paper. Goresh 
Hosangady provided invaluable help with the statistics. The staff of 
the Federal Election Commission, as ever, was unfailingly helpful, as 
were Ellen Miller and the staff of the Center for Responsive Politics. 
Max Holland and Jeri Scofield also supplied valuable material. 

To save space in what follows, I have tried to collect as many notes 
as possible at the end of paragraphs in the text. 


Money and Destiny in Advanced Capitalism: 
Faying the Piper, Calling the Tune 

ON JANUARY 29, 1848, Alexis de Tocqueville rose to issue an 
urgent warning to his colleagues in the French Chamber of Deputies. 
“I am told,” he said, “that there is no danger because there are no 
riots.” But, he continued, “I believe that we are at this moment 
sleeping on a volcano. ...” 

“Think, gentlemen, of the old monarchy: it was stronger than you 
are, stronger in its origin; it was able to lean more than you upon 
ancient customs, ancient habits, ancient beliefs; it was stronger than 
you are, and yet it has fallen into dust. And why did it fall? Do you 
think it was by some particular mischance? Do you think it was by 
the act of some man, by the [budget] deficit . . . No, gentlemen; there 
was another reason: the class that was then the governing class had 
become, through its indifference, its selfishness and its vices, 
incapable and unworthy of governing the country.” 

“Do you not feel,” finally asked the famous author of Democracy 
in America , “by some intuitive instinct which is not capable of 
analysis, but which is undeniable, that the earth is quaking once 
again? ”- 

De Tocqueville’s fellow deputies listened, but few heard him. 
Virtually to a man (all, of course, were males), they were astounded 
when, a few weeks later, a tide of revolution engulfed Paris and the 
rest of Europe. 

In the mid-1990s, the ominous sounds of the earth “quaking once 
again” are suddenly becoming audible to many Americans who never 
expected to hear them. Under pressure in the swiftly moving global 
economy, one corporate giant after another is “downsizing,” 
announcing massive layoffs, wage cuts, plant closings, and reductions 
in benefits, including health insurance. In some parts of the country, 
real estate values appear likely to remain low for years. Almost 
everywhere, cash-starved governments are cutting back on social 
programs long viewed as untouchable, while many “not-for-profit” 
institutions such as universities, museums, and schools waste away. 

Although the press still covers elections as though they were so 

many Kentucky Derbies and increasingly appears to believe that 
strange bedfellows are all there are to American politics, even the 
mainstream media sometimes betray doubts about the future of the 
“American dream.” Alongside its now well-stereotyped stories 
illustrating the indifference, the selfishness, and the vices of official 
Washington (the congressional pay raise and bank overdrafts 
scandals, savings and loans, Whitewater, the Capitol Post Office and 
Congressman Rostenkowski, or the Packwood debacle) appear 
occasional memorable vignettes of giddily leveraged buyouts and 
mergers, flagrant abuses of the tax code and employee pension funds, 
breathtaking statistics about the increase in the wealth of the top 1 
percent of the American rich in the eighties, and the fabulous rise in 
executive compensation—running, in many cases, far ahead of 
corporate performance. Former Secretary of State George Shultz, 
now a professor at Stanford University and director of many 
concerns, including Boeing, Bechtel, and Weyerhauser, has even 
wondered out loud if the feeble state of American labor unions is 
really healthy for the system as a whole.- 

But America in the nineties is a long way from Paris in 1848. When 
the earth began to rumble then, the City of Light had a revolution. By 
contrast, the United States sports perhaps the most smoothly efficient 
money-driven electoral system in the world. 

This ensures a strikingly different outcome. The essays in this book 
have shown how, in the midst of the greatest depression in world 
history, capital-intensive, multinationally oriented financiers and 
industrialists and their allies in export-oriented industry coalesced in 
support of Franklin D. Roosevelt’s Second New Deal. This 
multinational bloc can be demonstrated to have contributed in hugely 
disproportionate numbers to the financing of FDR’s critical 1936 
reelection campaign. Many of its leaders, in addition, played key 
roles in the administration or the policy-making process that 
produced the New Deal’s epoch-making legislative achievements. 

Depending on the strength of labor and the changing balance of 
power within the Republican Party between these liberal 
internationalists and their more protectionist and nationalist 
opponents, the multinational bloc’s attachment to the Democrats 
waxed and waned. But the political formula of this System of 1936— 
free trade and social welfare—dominated the American political 
landscape and inspired much of the rest of the world until the 1970s. 

Then the world economy turned decisively against it. In a complex 

process summarized in chapters 5 and 6, virtually the entire business 
community abandoned the Democrats. Facing intense pressure from 
foreign competitors, more and more enterprises sought to shift or 
lower costs by intensifying the globalization of production, lowering 
wages, reducing government regulation, and reducing taxes. Though 
the general public’s views on most issues of public policy either 
remained basically the same or actually shifted a bit in a liberal 
direction, a consensus formed within the business community in 
favor of rearmament, macroeconomic austerity, and domestic 
budgetary retrenchment.- 2 

Responding to these sentiments, the Carter administration tilted 
further and further to the right—most memorably by appointing Paul 
Volcker to chair the Federal Reserve and by chopping the budget on 
its own mass constituencies just ahead of the 1980 election, as it 
ratcheted up military spending. Not surprisingly, the party’s efforts to 
simulate the GOP availed it nothing. Its policies of economic 
austerity turned voters massively against it, bringing the Republicans 
to power. 

Unlike the Democrats, the GOP had never strongly championed 
the ideas that governmental power not only could but should help 
ordinary Americans as well as business, and that it was imperative to 
temper the often ferocious workings of the “invisible hand.” 

The new dominance of the Republicans, however, did not last. 
Very soon, extreme laissez faire proved unacceptable not only to the 
poor and vulnerable, but also to important parts of the business 
community. Led and, of course, financed by prominent business 
figures, the Democrats regrouped. In the early 1980s, many 
investment bankers, real estate magnates, and high-tech firms 
promoted a more activist course for government, as well as stricter 
budget discipline. Because of the budget crisis, this stance 
automatically implied limits to Pentagon spending, though neither the 
investment bankers nor the high-tech firms disputed the importance 
of maintaining a high level of military spending. In 1992, after four 
years of virtually no growth under the Bush administration, the 
coalition of businesses committed to the basic multinational project, 
but in favor of carefully limited state intervention, widened 
appreciably. Often citing the need for a break with (relatively) strict 
laissez faire orthodoxy, an important minority of business leaders 
defected to the Democrats. With major assistance from a super-rich 
Texan who could afford to chart his own unique course of 

conservative national renewal, this coalition triumphed with much 
less than a majority of votes. 

Now, however, average Americans who can hear the earth quaking 
—who are anxious about their jobs, education, health costs, 
pensions, and personal security—confront a severe problem. While 
there is no reason to doubt that many members of President Bill 
Clinton’s team devoutly hope some day to be able to promote bolder 
domestic policy initiatives, the business groups that dominate the new 
administration’s financing and many of its top policy-making slots 
differ only modestly from their Republican predecessors. The slight 
rise in upper bracket tax rates so narrowly—and noisily—wrought by 
the Clinton budget program in 1993 marks the pillars of Hercules of 
their tolerance for “sacrifice.” Almost neurotically sensitive to the 
risk of even tiny amounts of inflation, these groups are as committed 
as any Republicans to macroeconomic austerity and free trade (with 
everyone save perhaps parts of Asia). And in the end, quite like the 
Republican elites which dominated the Reagan and Bush 
administrations, they are likely to spend a plenary share of their time 
and attention pondering foreign, rather than domestic, policy 
conundrums—how to preserve peace and economic progress in Hong 
Kong or Western Europe, for example, rather than in Los Angeles. 

Not surprisingly, in recent years substantial numbers of Americans 
have come to feel that something is desperately wrong with their 
political system. Many polls indicate a growing demand for reforms, 
and the grass roots are stirring in all directions—on the left, on the 
right, and even in the center. Not one but several budding new 
parties have sprouted, while Ross Perot’s following continues to hold 
itself aloof from both the Democrats and the Republicans. Though it 
is perhaps an unlikely outcome, it is possible that 1996 will see not 
three, but four candidates with a plausible claim to national 
followings in the final leg of the race for the White House.- 

As the fluctuations in Perot’s popularity since the election suggest, 
these signs of discontent will surely vary not only over the course of 
the business cycle, but with every twist and turn of national politics. 
Still, all around the United States, campaigns on behalf of all sorts of 
“reforms” are kicking into gear: constitutional amendments to 
require a balanced budget; term limitations; various secession 
movements; any number of referenda. But one idea which stands out, 
though it certainly does not preempt all others, is the notion that the 
time has come for serious campaign finance reform. 

Obviously this is a sentiment that I completely share. I have no 
objection to term limits—if, as I suspect, they would slightly enhance 
the significance of party identification, they might do a little good. 
But they will do nothing to end the dependence of candidates and 
parties on big money. Anyone who wants to run will still have to pay 
to play, even if the number of lucrative go-rounds is limited by 
statute. By contrast, the balanced budget amendment is pre- 
Keynesian nonsense. It would virtually guarantee a major depression 
if seriously adhered to. And all forms of secession run up against the 
hard truth that motivated Trotsky’s famous old gibe that while you 
may not be interested in history, history is interested in you. 
Balkanization, I fear, is a poor answer, even in the Balkans. 

In the end, the only political change that will guarantee real reform 
is a wholesale restructuring of campaign financing. But as one 
contemplates the range of proposals that are crowding the agenda, it 
is impossible to escape a certain all-too-familiar sinking feeling. 

Precisely because the subject really is crucial all sorts of sham 
proposals now crowd the docket. Because these change with every 
legislative session, it is pointless to linger over the details of any one 
in particular. Suffice it to say that while reasonable people might 
disagree over whether the various bills supported at different times by 
the Clinton administration add up to a baby step in the right 
direction, neither the president’s proposals, nor those of the 
congressional leaders, nor —a fortiori —of the Republicans, nor of 
Perot come close to dealing seriously with the problem.- 

Like Common Cause, most of these blow hard about a peripheral 
problem—the notorious political action committees. PACs, however, 
are simply not that important in the grand scheme of political money. 
They account for slightly more than a third of all receipts in House 
races and about a quarter of receipts in Senate races. Their role in 
presidential races is insignificant; many candidates now routinely 
make the grand gesture of refusing money from them, as they open 
for business.- 

Because what really matters is individual contributions and soft 
money, PACs could be completely banned without changing anything 
fundamental. The major consequence would be that groups such as 
unions or eyeglass vendors, whose members are scattered over wide 
areas and not particularly rich individually, would have a much 
harder time coordinating. Large firms, which can organize themselves 
comparatively easily, would be little affected in the long run. The 

value of endorsements by the media would almost certainly be 
enhanced considerably—indeed, I am not alone in regarding this, 
along with the obstacle presented to unions, as one of the principal 
reasons this proposed “reform” is so popular. 

Most of the widely touted campaign finance reform proposals, 
including President Clinton’s, leave the door open for colossal 
amounts of the soft money that, as we saw in the previous chapters, 
now fuels both major parties. The president’s latest proposal, for 
example, suggests a limit on the size of such donations that must 
surely be very close to the median soft money contribution. 

Equally ineffective are the limits usually proposed on individual 
contributions (current federal law mandates a limit of $1,000, with 
primaries and general elections counting as two separate races), or, a 
fortiori, the much higher limits on total donations in a year. These 
simply codify candidates’ dependence on one set of very special 
interests—the comparative handful of Americans who can routinely 
afford to make donations of this size. (Indeed, the current system of 
presidential matching funds, which doubles the first $250 of suitably 
qualifying presidential primary contributions, amounts to a 
roundabout device for leveraging the contributions of major investors 
with public money.) 

The reforms proposed by the usual suspects also hurry past most of 
the other problems identified in essays in this book as sources of 
politically significant money. Long before Ed Rollins drew 
spectacular attention to such practices, parties and candidates had 
figured out that charities, foundations, and think tanks were all 
potential vehicles for money that in fact, if not in law, was campaign 
money. Nor do any amount of limits on spending and reports on 
funds help much to control the many other ways money is funneled 
to politicians all the time (see Figure 1 ). Nor do they address the 
more ramified ways, discussed earlier, that money deforms the 
political system, such as the question of media access, or the way big 
money links up with professional hierarchies at the bar, in the 
universities, and even in the pulpit. 

Does this mean that nothing can be done? That no specific reform, 
short of a transformation of the political system on at least the scale 
of the New Deal, can accomplish anything substantial? 

In an age in which the corrupting influence of political money has 
recently helped topple regimes in no less than three of the G7 
countries (Italy, Japan, France); is a major issue in at least two others 

(the United States and Germany); and has become the object of 
significant public concern in a sixth (Great Britain, where a special 
parliamentary commission is investigating), it would be idle to 
pretend that the millennium lies around the corner. 

But from an investment theory perspective, the problem is by no 
means hopeless. The usual regulatory formulations, however, are not 
the most helpful. 

Consider instead how the problem might be transformed. Let us 
agree that bribery and most other forms of funnelling cash to 
politicians should be sharply penalized. Let us also agree that 
campaign expenditures require some limitation, if only to prevent 
more and more of society’s resources from going down a black hole. 
Yet, no matter how diligent the regulators, it is likely that de 
Tocqueville’s “governing class,” with its “selfishness and its vices,” 
will contrive to find ways to corrupt the system. It is also likely that 
the favored candidates and parties of this class will from time to time 
attempt to circumvent spending limits. 

Therefore, turn the problem around. The first essay in this book 
(like the appendix , where the point emerges with particular starkness) 
argued that the classical approaches to democratic control of the 
state fatally underestimate the costs facing citizens who seriously try 
to exert that control. Not one but a host of barriers must be 
surmounted, including the often high costs of acquiring and verifying 
information, and the costs of finding allies, negotiating agreements, 
building a party, choosing candidates, campaigning, and so forth. 
Unless some way can be devised to share these costs, control of the 
state remains literally beyond the means of average citizens. 




COffrR/MiWfiS TO flEMtERS 

cooTCiau^oie to tc&tin&- 


fotfn\tflU'no»»s FPOM anitA 


lcumBv<rt»j-i to swrc and' 

CONTAieunoM.* PM W6tDCAZ.‘ 

AUcttm C/ot 


Xwdepemi> raat fxp&v^urvxEJi 

HONORARIA to ps/meR 



’ TO CHAdVT'f 




TRAve. FOR wc^acA 
Apifi SWFF 




ElAftoyMEMT OF Winc/ 


Entertainment of MEMBER 


. 'bOTMC.T cwtauttEe 

tONTfu Buttons 

Library R>Nbs 


FIGURE 1. The Many Pockets of a Politician’s Coat 

It is extraordinarily inefficient, and sometimes quite impossible, for 
individual citizens or even groups of citizens to cope with this 
problem on an individual basis. At best, everyone ends up duplicating 
work that could have been shared at a far lower unit cost if overhead 
costs had been spread out over the whole group and economies of 
scale tapped. At worst, an endless series of “let George do it” 
collective-action problems stymies all progress. 

A sensible public policy, accordingly, would build on the practices 
that virtually all modern democratic states have evolved to cope with 
these dilemmas. Whether or not they trumpet the facts, all modern 
states extensively subsidize many of these costs. The political parties 

of the United States and many other countries receive subsidies of 
various sorts. They qualify for matching funds; representatives frank 
mail; the state stages elections and counts the ballots, etc. They also 
teach civics, and require courses in government for a diploma from 
college or high school. As recent German discussions, in particular, 
have emphasized, even the practice of paying for legislative staff is a 
valuable form of subsidy.- 

What these nations, and particularly the United States, with its 
private domination of the airwaves, do not do is subsidize enough of 
these costs to do average citizens much good. Instead, most modern 
states pick up much of the tab for parties that only the rich can 
afford to control, because the “threshold” costs of entry are so 

This is the aspect of the system that needs to be changed. And the 
remedy is straightforward: Apply the “Golden Rule” for the benefit 
of the public as a whole: Provide sufficient public financing to allow 
ordinary people to run for office with a reasonable chance of getting 
their message out and getting elected. This could be done in any 
number of ways. One could simply extend some of the proposals 
now before Congress that would establish various voluntary schemes, 
probably with a variety of qualifying hurdles. Or one could take over 
the proposals advanced by some private groups with no particular 
axes to grind—those of the Center for Responsible Politics and the 
Working Group on Electoral Democracy are quite sensible and fair. - 

One can also envision other possible formulas: Congress could 
simply establish a system of modest tax credits for political 
contributions conferred by individuals on candidates or parties of 
their choice. A system like this would, for the first time, give 
candidates an incentive to appeal to the poor. If it was coupled with 
the requirement that radio and TV stations make available a certain 
amount of time to candidates as a condition for holding broadcasting 
licenses, its cost would be comparatively low.— 

However it was done, almost any system of public financing would 
have an extra benefit that is only rarely appreciated. It would 
seriously limit the harm that can be done by all the other ways wealth 
corrupts the system. Financing elections, after all, somewhat 
resembles a nuclear arms race. There is a limit to the advantages to 
be derived from blowing up the entire world twenty-seven or forty- 
four times. For virtually any practical situation, destroying everything 

ten times over should suffice. 

Analogously, if citizens with grievances or (what appear to be) 
heterodox points of view are able to get their messages out, respond 
to critics, and have a chance to counterattack (a stage of campaigning 
that is particularly expensive, as the appendix notes), the logic of the 
situation alters dramatically. Though last-minutes charges could sow 
confusion in particular races, it would be much more difficult to 
distort or suppress policy alternatives that would benefit the bulk of 
the citizenry in the long run. Other illicit uses of wealth in politics 
would also recede in importance, since no matter how corrupt any set 
of politicians were, they could not escape public criticism and 
competition from outsiders. Voters would have a real chance to hear 
alternative points of view. They could reflect upon these points of 
view, even if the press and the leaders of the academy were hostile or 
indifferent. If the electorate wanted, it could vote the critics in— 
whether or not any investor bloc at all was willing to finance the 

In the mid-1990s, hard-pressed taxpayers who are already irate 
about paying more for less from their government may not instantly 
see the logic of such a scheme. But there are ways to frame the issue 
to get the point across. Perhaps the most telling is simply to restate 
the “Golden Rule” as it applies to popular democracy: In politics, 
you get what you pay for. Or someone else does. 


The 1994 Explosion 

“Our issues are basically safe now, the health mandates, the employer mandates, the 
minimum wage. ... I don’t think those will be high priorities in a Republican 

GOPAC Contributor Thomas Kershaw 

Described by the Boston Globe as “a $10,000-a-year charter member” of Newt 
Gingrich’s “grand effort to engineer a Republican takeover of Congress” 

DOWN THROUGH THE AGES, survivors of truly epic catastrophes 
have often recounted how their first, chilling presentiment of 
impending doom arose from a dramatic reversal in some feature of 
ordinary life they had always taken for granted. Pliny the Younger’s 
memorable account of the destruction of Pompeii and Herculaneum 
by an eruption of Mt. Vesuvius in A.D. 79, for example, remarks how, 
in the hours before the volcano’s final explosion, the sea was 
suddenly “sucked away and apparently forced back ... so that 
quantities of sea creatures were left stranded on dry sand.”- 

Sudden, violent changes in an ocean of money around election time 
are less visually dramatic than shifts in the Bay of Naples. But long 
before the Federal Election Commission unveils its final report on the 
financing of the 1994 midterm elections, it is already clear that in the 
final weeks before the explosion that buried alive the Democratic 
Party, changes in financial flows occurred that were as remarkable as 
anything Pliny and his terrified cohorts witnessed two thousand years 
ago: A sea of money that had for years been flowing reliably to 
Congressional Democrats and the party that controlled the White 
House abruptly reversed direction and began gushing in torrents to 
Republican challengers. 

Throughout most of the 1993-94 “election cycle” a reversal of 
these proportions seemed about as likely as the sudden extinction of 
two important Roman towns did to Pliny’s contemporaries. The 
Republican Party, virtually everyone agreed, normally enjoyed a 
lopsided overall national advantage in campaign fundraising. But in 
the Congress, incumbency was decisive. Because big business, the 
Democratic Party’s putative opponent, ultimately preferred “access” 
over “ideology,” Democratic Congressional barons could reliably 

take toll—enough to make them all but invulnerable for the indefinite 

In addition, the Democrats now also controlled the White House. 
By comparison with its recent past, the party was thus exquisitely 
positioned to raise funds for the 1994 campaign. It could extract vast 
sums of “soft money” (funds allegedly raised for state and local 
party-building purposes, but in fact closely coordinated with national 
campaigns) from clients (i.e., patrons) in the business community. It 
could also exploit the unrivalled advantages occupants of the Oval 
Office enjoy in hitting up big ticket individual contributors. 

The glib contrast between “access” and “ideology” was always at 
best a half-truth. Particularly if one reckons over several election 
cycles, the differences in total contributions flowing to a Democratic 
leader who literally opened for business, such as former House Ways 
and Means chair Dan Rostenkowski, and a populist maverick like 
outgoing House Banking Committee chair Henry Gonzalez, are quite 
fabulous. Between 1982 and 1992, for example, FEC figures indicate 
that Rostenkowski succeeded in raising more than four million 
dollars in campaign funds. Over the same period, Gonzalez’s 
campaigns took in less than $700,000. Among Democratic 
Congressional leaders, Rostenkowski’s was far from a record-setting 
pace. Not including funds formally raised for his forays into 
presidential politics, Richard Gephardt, formerly House majority 
leader and now minority leader, raised over seven million dollars in 
the same stretchA 

Differences of this order demonstrate that, in the long run, 
“access” eventually leads to favorable policy outcomes—or the 
money goes elsewhere. Airy talk about mere “access” also subtly 
diverted attention from the historically specific stages of the 
accommodation between the Democrats and big business as the New 
Deal System died its painful, lingering death of 1,000 contributions.- 

Early reports by the FEC for the 1993-94 election cycle appeared 
to confirm the conventional wisdom. In August, the FEC released a 
survey of national party fundraising efforts (a much narrower 
category than the name suggests, since it takes no account of, for 
example, the separately tabulated efforts of individual campaigns for 
Congress, where the consolidated totals run far higher). This 
indicated that the Republicans were continuing to cling to their 
overall lead. Fundraising by the national Democratic party, however, 
was up by 34 percent compared to the same period in 1991-92, 

when George Bush was president^ 

In the bellwether category of soft money, one of the best available 
indicators of sentiment among America’s largest investors, the 
contrast in regard to the same period was even sharper: Democratic 
receipts had doubled, to $33 million, while GOP receipts were down 
28 percent, to a mere $25 million. 

Early statistics on Congressional races indicated much the same 
trend. One FEC report released during the summer showed the early 
flow of contributions to Democratic candidates in all types of races— 
incumbencies, challenges, and, especially, open seats—running well 
above the levels of 1991-92. By contrast, House Republican 
candidates in every category trailed well behind their Democratic 
counterparts in average (median) total receipts. Other FEC statistics 
indicated that in House races, corporate PACs were tilting strongly in 
favor of Democratic candidates.- 

As late as October, reports continued to circulate in the media of 
persisting large Democratic advantages in fundraising in regard to 
both Congressional races and soft money.- By then, however, little 
puffs of smoke were appearing over Mt. Vesuvius. Leaks in the press 
began to appear, suggesting that the Republicans, led by the 
redoubtable Newt Gingrich, were staging virtual revivals with 
enthusiastic corporate donors, lobbyists, and, especially, PACs. 

On November 2 came what could have become the first public 
premonition of the coming sea change: New figures for soft money 
published by the FEC indicated that between June 30 and October 
19, the Democrats had managed to raise the almost laughable sum of 
$10 million dollars, while the Republicans had pulled down almost 
twice that much. Alas, the media and most analysts concentrated on 
each party’s now closely similar take over the full two-year cycle. No 
one asked what had happened to dry up money to the Democrats in a 
period in which most observers still took for granted continued 
Democratic control of at least the House. Neither did anyone think 
to project the new trend, which was undoubtedly gathering 
additional fierce momentum in the final, delirious weeks of 
fundraising as the GOP scented victory.— 

Two days later, the Commission published data on Congressional 
races throughout October 19. Though almost no one noticed, the 
new data pointed to a startling turnabout: funds to House 
Republican challengers and candidates for open seats were now 

pouring in at approximately twice the rate of 1992. Democratic 
totals were up only slightly, save for a somewhat larger rise among 
candidates in races for open seats (that, unlike 1992, left their median 
receipts well behind those of their GOP counterparts). — The ceaseless 
drumbeating by Newt Gingrich and other Republicans was beginning 
to pay off. Only a few months before, corporate PACs investing in 
House races had been sending 60 percent of their funds to 
Democrats. By October, the PACs, along with other donors, were 
swinging back toward the GOP. 

The trend was strongest where it probably mattered most: in races 
waged by challengers and candidates for open seats. A study by 
Richard Keil of the Associated Press indicates that in 1992 PACs as a 
group favored Democratic challengers and open-seat aspirants by a 2 
to 1 margin. By October 1994, however, the AP found that PACs had 
switched dramatically: More than half of their donations to 
challengers and open-seat aspirants were going to GOP candidates. 
The Associated Press figures are for PACs as a group, and thus 
include contributions from Labor PACs, which give lopsidedly to 
Democrats. The real size of the shift within the business community 
and related ideological PACs is, accordingly, significantly 
understated. - 

Pressed by Gingrich, who wrote what the AP described as a 
“forceful memo” on the subject to would-be Republican leaders of 
the new House, the GOP also made efficient use of another 
emergency fundraising vehicle: the shifting of excess campaign funds 
from Republican incumbents with a high probability of reelection. 
Additional last minute spending against Democratic candidates also 
appears to have come from organizations “independent” of the 
parties, but favoring issues firmly associated with Gingrich and the 
Republicans, such as the recently founded Americans for Limited 

With so many races hanging in the balance (the Republicans, in the 
end, garnered only 50.5 percent of the total vote, according to a 
study by Stanley Greenberg for the Democratic Leadership Council), 
the tidal wave of late-arriving money surely mattered a great deal. 
But the AP’s striking analysis of the effects of this blitz underscores 
just how wide of the mark were the establishment pundits who 
rushed to claim that “money can’t buy everything” in the wake of 
razor-thin defeats suffered by high-visibility, high-spending 

Republican Senate candidates in California and Virginia.— 

The AP examined sixteen House contests decided by four 
percentage points or less. Campaign funds from Republican 
incumbents to other Republican candidates came in at three times the 
rate of donations from Democratic incumbents to their brethren. The 
Republicans won all sixteen. Even more impressive, of the 146 
Republicans estimated by the AP to have received $100,000 or more 
in PAC donations, 96 percent were victorious—a truly stunning 
result when one reflects that much of the late money was clearly 
funnelled into close races.— 

Most election analysts in the United States habitually confuse the 
sound of money talking with the voice of the people. Thus it was 
only to be expected that as they surveyed the rubble on the morning 
after the election, many commentators gleefully broadjumped to the 
conclusion that the electorate had not merely voted to put the 
Democratic Party in Chapter 11, but had also embraced Newt 
Gingrich’s curious “Contract with America.” But the evidence is very 
strong that it’s still “the economy, stupid,” and that the 1994 election 
was essentially the kind of massive no-confidence vote that would 
have brought down the government in a European-style 
parliamentary system. 

Let us start with some obvious, if once again relatively neglected, 
facts. As an anointed representative of massive blocs of money, Newt 
Gingrich may indeed be on his way to becoming a figure of towering 
significance in American politics. But until the sunburst of publicity 
that followed the election, he was just another face in the crowd to 
most Americans. In a Yankelovich poll of 800 adult Americans taken 
for Time/CNN immediately following the vote, 68 percent of 
respondents said they were not familiar with him. (Another 3 percent 
were unsure of their response; of those who were, slightly more 
people—16 percent vs. 13 percent—viewed him unfavorably rather 
than favorably.)— 

It is true that a few late Democratic ads targeted the Contract and 
that the White House briefly attacked it. But the Contract itself was 
essentially an inside-the-beltway gimmick, publicized in the closing 
weeks of the campaign to answer the charge—coming mostly from 
desperate rival elites who saw all too clearly what was happening— 
that the GOP stood for nothing in its own right, and was simply 
trying to win by opposing Clinton and the Democrats. Based on what 
we know about the way ideas play off personalities in American 

politics, it is hard to believe that in such a short, distracted time 
stretch the Contract could have become much more visible or 
attractive than Gingrich himself. — 

Neither does survey evidence about the public’s attitudes support 
sweeping claims about a sharp new “right turn” by the mass public. 
Virtually all polls released so far rely on various forms of so-called 
forced-choice questions. Because these squeeze the respondent to 
make choices between alternatives selected by the survey designer, 
they are not always a happy tool for sorting out views and opinions 
that were actually important to voters as they made up their minds 
from the welter of other convictions that they have, but which were 
irrelevant to their voting decisions. For example, it does not 
automatically follow that, because voters do not care for a president’s 
foreign policies, their distaste will actually carry over to their voting 
decisions. Many may simply vote their pocketbooks. Their truthful 
answer to a foreign policy question might be irrelevant.— 

Forced-choice questions also lend themselves to misinterpretation, 
by posing choices that the electorate (or pollsters) may not realize are 
in fact incompatible, or by omitting alternatives that voters consider 
important. Depending on which responses receive emphasis, the 
electorate can appear to be moving in almost any direction. Thus, 85 
percent of those interviewed in the Yankelovich poll, attached “high 
priority” to reducing the federal budget deficit; 75 percent attached a 
similar priority to a Constitutional amendment to balance the budget; 
54 percent agreed that legislation to limit the terms of members of 
Congress to twelve years was also a “high priority” item; 82 percent 
thought tougher crime enforcement legislation was also. The same 
poll showed large majorities favor placing a “high priority” on 
actions to limit welfare payments (66%) and a line-item veto for the 
president (59%).— But this particular survey (which is quite well 
crafted by the standards of the trade) did not ask voters a number of 
other questions. For example, respondents were not asked whether 
they ranked economic growth above deficit reduction. In all polls 
known to me, whenever that question is asked, growth is the 
landslide winner. - 

Nor was the public asked its views about cutting Social Security or 
the wisdom of making many specific budget cuts (e.g., in Medicare 
and Medicaid) that the affluent sponsors of the balanced budget are 
seeking to impose by what is, in reality, stealth. In a post-election poll 

by Greenberg for the DLC of people who said they had voted, 62 
percent of those interviewed indicated that protecting Social Security 
and Medicare should be either the “single highest” or one of the “top 
few” priorities of the president and the next Congress. Sixteen 
percent placed increasing defense spending within those two 
categories. Gingrich and the GOP’s stalwart opposition to raising the 
minimum wage is also unlikely to resonate strongly with most 
Americans. — 

One also needs to remember that many Americans have been 
ideologically conservative and programmatically liberal for decades. 
At no time before, during, or after the New Deal were new taxes, 
more bureaucracy, or “big government” ever anyone’s idea of shrewd 
political appeals. This is one of several reasons for skepticism about 
the meaning of the discovery, by Greenberg working for the DLC, 
that if respondents are forced to choose between “traditional 
Democrats who believe government can solve problems and protect 
people from adversity” and “New Democrats who believe 
government should help people equip themselves to solve their own 
problems,” 66 percent say they identify with the latter. - 

To the extent the answer does not reflect unalloyed familiarity with 
beltway buzzwords, I suspect strongly that one would find roughly 
the same pattern of responses at any point in the high New Deal. 
Who now remembers, for example, that in the very first Gallup Poll 
published in 1935, 60 percent of respondents said that too much 
money was being spent on “relief and recovery”? On the other hand, 
Greenberg’s survey does show clearly enough that whatever the 
popular mood about government action (which, as indicated below, 
has hardened), a majority of respondents flatly reject what certainly 
qualifies as the guiding idea of the Contract that “government should 
leave people alone to solve their own problems.” - 

Nor is this all. Fifty-four percent of respondents in the Yankelovich 
poll also came out for tougher legislation to regulate lobbying, which 
Gingrich staunchly opposed as he solicited corporate cash. (This 
news was reported in a preelection leak to the Washington Post; a 
Democratic Party less hopelessly mortgaged to pecuniary interests 
could have trumpeted it until the heavens resounded.) Forty-five 
percent also indicated campaign finance reform as another “high 
priority.” In the great tradition of predictive social science, one can 
venture to suppose that Mt. Vesuvius will freeze over before House 

Republicans offer anything except cosmetics on this decisive issue.— 

Surveys also suggest that the Clinton administration’s own Rube 
Goldberg scheme for health-care reform did finally become 
unpopular with many voters. In the later stages of the mammoth 
onslaught against health-care reform by industry groups, opinion also 
wavered on related health issues. Still, 72 percent of those polled by 
Yankelovich wanted health-care “reform” to be a “high priority” in 
the next Congress. Health-care reform also topped all other responses 
in the poll when respondents were asked to pick one issue as the top 
priority of the new Congress. Whatever senses of “reform” 
respondents read into those questions, most surely intend something 
quite different from anything Gingrich and the new GOP majority in 
Congress have in mind.— 

More abstract—and hence, perhaps, less clearcut—benchmarks 
also show no sudden new turn to starboard. While election day 
surveys do not exhaust the complicated question of how the public 
labels itself, the party identification figures in the (very large) New 
York Times election-day exit poll actually moved the wrong way for 
a new “right turn” hypothesis: this year the percentage of self- 
described Democrats was 41 percent, compared to 38 percent in 
1992. (The percentage of self-described Republicans did not change; 
while the percentage of Independents dropped one percent.)— 

Based on the percentages of the mass population who—in contrast 
to Democratic presidential candidates—remain willing to identify 
themselves with a specific political ideology, even the dreaded “L- 
word” does not yet seem quite ready to join the spotted owl on the 
list of politically endangered species. In 1994, 18 percent of 
respondents in the New York Times election-day survey described 
themselves as—or perhaps, confessed to being—“Liberal.” A drop of 
3 percent from 1992, this looks provocative, until one realizes that 
the figure in, for example, 1988, was again 18 percent. The trend in 
the percentage of self-described “Conservatives” was essentially a 
mirror image of these small zigs and zags: 34 percent in 1994, 29 
percent in 1992, but 33 percent in 1988; the only other choice given 
in all three years was “moderate.”— It may also be suggestive that 
some Democrats—including Massachusetts senator Edward Kennedy 
—who were sagging dangerously in the polls, but who still 
commanded sufficient financial resources to make effective 
counterarguments rallied to victory as they attacked the Contract. 

Polls by the Los Angeles Limes Mirror Center suggest that 
opinions about race have fallen back somewhat since 1992, when the 
publicity and protests surrounding the Rodney King case led to sharp 
increases in the percentages of respondents reacting sympathetically 
to African-American concerns. Yet, despite the noise about 
Republican gains in the South (which have a solid basis in that 
region’s changing industrial structure and institutional obstacles to 
unionization and community organizations that the press and most 
scholars virtually ignore), one cannot plausibly blame the staggering 
Democratic losses nationwide on some inchoate perception that the 
administration was “excessively” partial to minorities, or even to 
cities. The Clinton administration too obviously turned its back on 
all such concerns, and people associated with them.— 

A number of Republicans, of course, made a major issue out of 
illegal immigration. But this scarcely explains the across-the-board 
GOP victory. First, the issue in fact cuts across party lines, both in 
Congress and in the states (e.g., Florida). During the campaign, 
Republican elites divided sharply on the question, not least because 
so many see it as intimately bound up with “economic growth” 
(translated into plain “English only”: low wages).— 

Most fatefully, however, immigration’s emergence as an object of 
mass political concern in American politics very much resembles the 
gathering trend toward greater hostility to government activity or the 
various other (mostly far smaller) rightward shifts in public opinion 
mentioned above or documented in other recent polls.— It is 
essentially a reactive phenomenon, an emergent, constructed reality 
that grows out of the persisting failure by (money-driven) 
governments to do much more than talk about problems like high 
unemployment, which, along with the federal reluctance to share 
revenues with states receiving large numbers of immigrants, surely is 
the key to the upsurge in anxiety about immigration. 

Senator Feinstein’s narrow victory in the California Senate race 
that will, at least until 1996, go down in the Guinness Book of 
World Records as the most expensive nonpresidential campaign in 
world history is one more proof that where there are resources and a 
will to counterargument, issues of this sort can be effectively engaged. 

What destroyed Bill Clinton and the Democrats in 1994, however, 
was precisely what derailed his Republican predecessor only two 
years earlier: in the midst of a steadily deepening economic crisis, it is 
impossible to beat something—even a fatuous, heavily subsidized 

something—with nothing. 

But this was the hopeless task Clinton set for himself and his party 
after he (precisely as some of us predicted on the basis of the 
outpouring of Wall Street support for his “New Democrat” 
candidacy in 1992) betrayed his campaign promise to “grow out” of 
the deficit by “investing in America” as he assumed office in 1993. 
By deciding to make the bond market the supreme arbiter of 
economic policy, by ostentatiously refraining from jawboning the 
Federal Reserve to restrain rises in interest rates, by abandoning his 
much touted plan for an economic stimulus and instead bringing in a 
budget that was contractionary over the medium term, the president 
embraced precisely the program of continuing austerity that the 
electorate elected him to break with.— 

Once he had embarked on this course, most, if not quite everything 
else he tried to do was doomed. No amount of PC posturing, 
homilies about values, or pathetically funded demonstration schemes 
for worker training or education could long disguise the fact that 5.5 
or 6 percent unemployment is not really full employment, and a 
fortiori, not a “boom.” Note that, as usual, no one in the 
administration spoke up in public to support Alan Blinder, the 
President’s own nominee to the Federal Reserve Board, during the 
firestorm of criticism that followed his few brief remarks in a 
nonpublic speech about the weakness of the case for the much touted 
[high] “natural rate of unemployment” hypothesis. Because of this 
incident’s chilling effect on future discussions of Fed policy, it may 
well be every bit as significant as the 1994 election itself.— 

By some estimates, based on census data, the economic situation of 
as much as 80 percent of the population has not substantially 
improved since 1989. Such statistics may slightly underestimate the 
true level of economic welfare, particularly as this is affected by the 
thorny problem of valuing new products and changing quality.^ 

But this is arguing about decimal points. What matters is the real 
“chain reaction” that now threatens to blow apart the political 
system. This chain reaction begins with the desperate economic 
squeeze a largely unregulated world economy now places on ordinary 
Americans. It leads next to the decay of public services and nonprofit 
institutions that sustain families and communities, including schools, 
court systems, and law enforcement. In the end, it makes the daily life 
of more and more Americans increasingly unbearable. 

Given that the Democrats controlled both the White House and 

Congress, it is scarcely surprising that so many Americans are fed up 
with them. Or that substantial numbers of citizens should be 
increasingly attracted to the only public criticisms of the system that 
they are consistently allowed to hear (particularly on talk radio or the 
generally right wing “new media”)—that their real problem is the 
bell curve, immigrants, welfare, or indeed, the very notion of 
government action itself, which does inevitably cost money.— That 
the system is so obviously money-driven and frequently corrupt only 
enrages people, while the administration’s all out efforts for NAFTA 
and GATT underscored the fact that Clinton’s priorities and his real 
constituency were somewhere else. 

Sixty percent of those in the Yankelovich poll expressed the belief 
that the outcome of the 1994 election was more a “rejection” of 
Democratic policies than a “mandate” for Republican policies. Fifty- 
six percent of the voters in the Greenberg survey claimed that they 
were “trying to send a message about how dissatisfied [they] were 
with things in Washington.” Invited to be more specific, 15 percent 
said the message referred to “Bill Clinton,” 15 percent pointed to 
“Congress,” 5 percent each indicated “Republicans” and 
“Democrats”; while 45 percent said the problem was “politics as 

But the most striking evidence about what is now happening in the 
American political system comes from the New York Times election- 
day exit poll. This broke down the vote in terms of whether the 
respondent reported that his or her standard of living was becoming 
better or worse. The results are astonishing in the light of the 
publicity garnered after the election by the eight-point spread in the 
overall party vote by men and women, as well as conventional views 
that the Democrats mobilize less-well-off voters. In both the overall 
national vote and major state campaigns that were separately 
reported (including the New York gubernatorial and Massachusetts 
Senate race), those whose standard of living was improving voted 
roughly 2 to 1 (66%/34% in the national sample) for the Democrats. 
By contrast, those whose standard of living was getting worse went 
roughly 2 to 1 (63%/37% in the national sample) for the 

Republicans, while the group in the middle split 50/50.— 

The contrast with 1992 is glaring: at that time, according to the 
New York Times exit poll, Clinton lost the former camp by 62 
percent to 24 percent (with 14% going to Perot). He split the group 
in the middle, 41 percent to 41 percent (with 18% voting for Perot). 

But he swept the group whose standard of living had declined by an 
overwhelming 61 percent to 14 percent (with, suggestively, 25% 
going to Perot).— 

The 1994 surveys still show a sizeable pocket of people with low 
incomes and relatively little schooling who, when they vote, remain 
stalwart Democrats. But these numbers show just how upside down 
patterns of mobilization are now becoming in America. The 1994 
elections essentially suggest that the party that commands by far the 
most money is now succeeding by mobilizing increasing numbers of 
disenchanted poor- and middle-class voters against their traditional 
champions.— This is a voting pattern more reminiscent of some 
European elections in the 1930s than most American elections. It 
ought to ring some alarm bells. Asked whether the Republicans 
would do a better job of running Congress than did the Democrats, 
61 percent of respondents in the Yankelovich poll declared that they 
would either do a worse job (16%) or make no difference (45%). 
Sixty-one percent, in other words, expect no major improvement.— 

A full analysis of Newt Gingrich’s Contract with America is not 
possible here. There is space only to observe that the voters may well 
be right. Nothing in the Contract really addresses the problems of a 
world economy in which many of the biggest American businesses 
increasingly do not need most of the American workforce or even the 
infrastructure—apart from the defense and foreign relations 
establishments—for anything. Nor will the suggestion by Gingrich 
and other Republican leaders after the election that price stability 
should perhaps be legally enshrined as the sole target for Federal 
Reserve policy.— 

What will happen as the economic crisis deepens, and voters 
discover that their suspicions were right? Perhaps for a while, the 
merry-go-round in Washington will spin with the speed of light.— 
But in the long run? In all probability, I suspect, Mt. Vesuvius’s 
greatest blowouts are still to come. As in the thirties, those who scorn 
Keynes will be astonished at the outcomes for which they will have to 
accept responsibility. 


I am grateful to Richard Keil, Benjamin Page, Robert Shapiro, and seminar audiences at 
Columbia University and the New School for Social Research for comments on early 
versions of this postscript. 


Deduced and Abandoned: Rational Expectations, 
the Investment Theory of Political Parties, and the 
Myth of the Median Voter 

We are here plunged in politics funnier than words can express . . . The public is angry 
and abusive. Everyone takes part. We are all doing our best and swearing like demons. 
But the amusing thing is that no one talks about real interests. By common consent 
they agree to let these alone. We are afraid to discuss them. Instead of this, the press is 
engaged in a most amusing dispute whether Mr. Cleveland had an illegitimate child. 
Henry Adams 

If you truly had a democracy and did what the people wanted, you’d go wrong every 

Dean Acheson 

IN THE TURBULENT spring of 1919, Bronson Cutting, a wealthy 
Progressive who controlled one of New Mexico’s leading 
newspapers, decided to throw in with the enthusiasts who were 
pushing General Leonard Wood for the 1920 Republican presidential 
nomination. For a few months Cutting and like-minded local 
acquaintances worked by themselves, in virtual isolation, for the 
general, who was widely perceived as the heir to the mantle of the 
recently deceased Theodore Roosevelt. 

Late in the summer, however, Wood’s own powerful, Eastern- 
centered national campaign organization reached out to them. John 
T. King, the former Republican national committeeman from 
Connecticut who was one of the general’s key national organizers, 
wrote to Cutting. Inviting cooperation, King requested an assessment 
of the local political scene. 

The publisher responded at once. In a lengthy letter, Cutting 

The Republican party in New Mexico has for a long time been split up into two 
bitterly antagonistic factions, one of which has controlled the northern and the other 
the southern counties of the state. Each group has been to a large extent controlled by 
rival corporate interests. 

The northern group represents the Maxwell Land Grant Company the northern 
coal mines and the St. Louis and Rocky Mountain railroad. In the background is the 
powerful but unobtrusive influence of the Aftchison] T[opeka] & S[anta] F[e] 
Railway. The chief figures in this group are: 

Charles Springer, of Cimarron, manager of the Maxwell Land Grant Company and 
president of the State Council of Defense [a privately funded, but state-sanctioned 
“voluntary” organization that was then crusading against labor unions and “radical” 

Jan Van Houten, of Raton, vice president of the St. Louis & Rocky Mountain 

John S. Clark, of Las Vegas, president pro tem of the state senate. 

Secundino Romero, of Las Vegas, sheriff and boss of San Miguel County. 

Judge Clarence J. Roberts, of the supreme court, residing in Santa Fe. 

Governor O. A. Larrazolo, who, however, has kept free of factional alliances since 
he has been governor. 

The controlling interest in the southern group is the Phelps Dodge Company (El 
Paso & Southwestern Railroad) with such allied corporations as the Chino Copper 
Company, etc. Its principal figures are: 

H. O. Bursum, of Socorro, national committeeman. 

Senator A. B. Fall. 

W. A. Hawkins, of El Paso, counsel for the E. P. & S. W. 


Eduardo M. Otero, Los Lunas, sheep man and boss of Valencia County. - 

In a sparsely populated, semi-peripheral state where human life 
was often cheap, Bronson Cutting stood out. He was a genuine 
Progressive, frequently at odds with the rest of the state’s political 
establishment, someone who, years later, would end up switching 
parties and supporting Franklin D. Roosevelt. In sharp contrast to 
King, whose corrupt relations with a powerful bloc of business 
leaders exploded into a scandal that eventually brought down the 
Wood campaign, he was on no one’s payroll except his own. 

If in 1919, accordingly, he initially disregarded warnings from his 
friends that “there is no sincerity in the advocacy of the Republican 
ring here for the General, and that their intention is to trade him for 
[Illinois Governor Frank] Lowden or [Ohio Senator Warren G.] 
Harding at the convention,” it was only because—for a time—he still 
reposed too much starry-eyed trust in the publicly professed 
principles of Progressive Republicanism. 

This appendix, however, is not concerned with Cutting’s political 
biography or the 1920 campaign. Its focus is broader, and concerns 
whether the account of party competition implicitly put forward in 
the New Mexico publisher’s letter to King—according to which 
rivalries and competition between major investor blocs provide the 
mainspring (but not the only spring) of partisan competition—might 
provide a better guide to politics in countries like the United States 
than the usual “median voter” model.- 

In a series of recent essays (some of which are reprinted in revised 
form in this book) I argue in effect that the answer is yes—that 

classical theories of democracy greatly underestimate the costs facing 
ordinary voters as they attempt to control the state. As a 
consequence, political parties in countries such as the United States 

are not what . . . most American election analyses . . . treat them as, viz . . . the 
political analogues of “entrepreneurs in a profit-seeking economy” who “act to 
maximize votes” . . . Instead, the fundamental market for political parties usually is 
not voters. . . . Most of these possess desperately limited resources and—especially in 
the United States—exiguous information and interest in politics. The real market for 
political parties is defined by major investors, who generally have good and clear 
reasons for investing to control the state. . . . Blocs of major investors define the core 
of political parties and are responsible for most of the signals the party sends to the 

electorate, (chapter 1, p. 22 1- 

In such investor-driven systems, the dynamics of political competition 
are very different from what traditional democratic theory imagines: 

[Pjolitical parties dominated by large investors try to assemble the votes they need by 
making very limited appeals to particular segments of the potential electorate. If it 
pays some other bloc of major investors to advertise and mobilize, these appeals can 
be vigorously contested, but ... on all issues affecting the vital interests that major 
investors have in common, no party competition will take place. Instead, all that will 
occur will be a proliferation of marginal appeals to voters—and if all major investors 
happen to share an interest in ignoring issues vital to the electorate, such as social 
welfare, hours of work, or collective bargaining, so much the worse for the electorate. 
Unless significant portions of it are prepared to try to become major investors in their 
own right, through a substantial expenditure of time and (limited) income, there is 
nothing any group of voters can do to offset this collective investor dominance, 
(chapter 1, p. 28 ) 

As publicly recorded campaign expenditures have skyrocketed in 
the United States and other countries, this argument has won some 
favorable notice. Several analysts have recently concluded that their 
case studies support an investment theory approach. Among these are 
the author of an imaginative quantitative assessment of press 
coverage of the 1964 presidential election (Devereux, 1993), a 
historian of the 1920s Democratic Party (Craig, 1992, pp. 7, 155) 
and, mirabile dictu , the Wall Street Journal, which recently informed 
readers that “the 1992 election proves that the investment theory of 
political parties is correct” (Wall Street Journal, 1992). 

But not everyone, to put it mildly, is equally enthusiastic. Ever 
since 1983, when my first essay appeared, some analysts have 
complained that the investment approach implies that elections 
should go automatically to the highest bidder—an outcome which, 
they insist, simply cannot be true, however superficially attractive it 

may appear to casual consumers of FEC statistics. Other critics allege 
that the investment approach implies a passive role for voters, or 
even ignores them all together. 

Two very prominent rival schools of thought, in addition, have 
claimed to refute the investment approach. Champions of the well- 
known “retrospective voting” approach assert that by simply “voting 
the rascals out,” the electorate can bypass all the problems my 
original essay raised about the tendency to investor dominance of 
parties and policymaking. Two celebrated “rational choice” analysts, 
Richard McKelvey and Peter Ordeshook, reach essentially the same 
conclusion by a somewhat different route. They claim that a 
consistent “rational expectations” approach to questions about the 
use of information by voters invalidates my earlier essay. By relying 
on easily available “cues,” they argue, voters can learn all they need 
to know to enforce majority (median) control (McKelvey and 
Ordeshook, 1986).- 

This appendix responds to these critics by restating in a compact 
and, I hope, pointedly accessible, fashion the fundamental 
propositions of my investment approach to party competition. It 
begins by setting out a simple example to make the key point crystal 
clear: the general failure of the median position in elections “in which 
money matters.” This same case is then analyzed more closely, to 
point up the fallacy in suggestions that an investment approach 
makes electoral outcomes a linear function of total spending. A last 
glance at the example reveals an important implication of the 
investment approach that many critics have missed—that even voters 
who were virtually perfectly informed might easily be unable to 
control policy. 

The striking implications of this point are developed in the course 
of an effort to pin down more precisely the role voters play in money- 
driven political systems. By broadening the original single-issue 
model to incorporate the role of (subsidized) political ideas and 
rhetoric, it is easy to show how choices voters make affect elections 
and parties—without any tendency for the parties to converge on the 
median position. 

The essay then tackles head-on the important, and much neglected, 
question of how “systematic error” by voters can be reconciled with 
the abundant empirical evidence that most of them are not passive, or 
foolish, and that they clearly attempt to make sense of campaigns. 
This exercise, which is essentially a critique of McKelvey and 

Ordeshook, yields a clear statement—at last—of just what is 
required, both objectively and subjectively, for voters to be 
systematically mistaken over long periods of time about candidates 
and parties. 

The essay’s theoretical argument is supported throughout by 
references to empirical analyses, by Stanley Kelley, John Geer, and 
other analysts, of actual voting decisions. By contrasting the role 
information plays in the functioning of politics and the stock market, 
this discussion exposes the hollowness of claims that free markets 
guarantee voters all the information they need to vote in their own 
best interests—whether the “markets” in question are served by 
political parties or the media. 

The final section of the appendix considers Fiorina’s retrospective 
voting model (Fiorina, 1981). This “just say no” approach to popular 
democracy, I suggest, solves no fundamental problem of democratic 
control of elections. 


Let us begin, however, with the investment theory’s bedrock claim: 
what might be termed the general failure of control by the so-called 
median voter (the voter whose strategic position exactly in the middle 
of a distribution of voters guarantees a candidate one more vote than 
he or she needs to defeat all comers). 

The argument can be developed with any degree of detail and 
formal rigor. But it is perhaps most easily and convincingly outlined 
in terms of a single concrete example designed to demonstrate with 
the clarity of a laboratory experiment just how money-driven 
political systems can thwart the will of even overwhelming majorities 
of voters. 

Imagine a world in which labor-intensive textile producers 
command virtually all pecuniary resources beyond those necessary 
for ordinary wage earners to live (a world, that is, in which the so- 
called “classical savings function” popularized by Kalecki, Kaldor, 
and Robinson applies). Such a situation is perhaps most conveniently 
pictured along the lines of some company town of the early Industrial 
Revolution, but as will shortly be evident, conditions long ago and 
far away are not the essence of the problem. A fortiori, neither is the 
classical savings function. 

Suppose, further, that an election is being staged, in which 

everyone votes for one of two political parties. There is only one 
issue, and everyone agrees on what it is: passage of legislation that is 
likely to lead to 100 percent unionization of the labor force. All wage 
earners agree that the law is desirable. All textile magnates (3 percent 
of the total voting population) vehemently disagree. 

What stance do the political parties take? 

Analysts impressed by the familiar spatial models of party 
competition will of course reply that the parties must head 
immediately to the median position at the far right of figure A.l , 
where virtually all voters are located.- 

The investment theory, however, spotlights a detail that leads to a 
dramatically different expectation: When money matters importantly 
to mounting campaigns , no party can afford to take up the median 
position that represents the views of the vast majority, if investors 
disagree. The mere fact that votes are out there does not imply that 
any party can afford to campaign for them, even if its message is 
what they would want to hear. 

In this instance, all parties depend on textiles for funding. The 
textile industry, of course, will not pay to undermine itself. It thus 
subsidizes only candidates opposed to passage of the law. (Readers 
who have been exposed only to the median voter model are often 
inclined to object: But wouldn’t the textile party improve its chances 
of winning by embracing unionization? The all-but-irresistible 
tendency to this mistaken inference illustrates perfectly how a bad 
model can blind social scientists—and many ordinary people, who 
intuitively know better—to the harsh realities of money-driven 
political systems. The short answer is that if the cost of winning the 
election really were sponsoring unionization, textiles would, 
paradoxically, lose by adopting the “winning” strategy.) 

% Voters 

Desired % Union 

FIGURE A.l. Voters, Investors, and Unionization: An Idealized Example 

Given that the textile industry is the only source of campaign 
funds, all parties must comply with the industry’s demand for a 
union-free environment, or else they cannot afford to compete at all. 
Without collusion or “conspiracy” of any kind, accordingly, each 
party independently discovers that available funds constrain it to 
champion the very same rate of unionization as all others: 0 percent, 
ironically, on the far left in figure A.I .- 

The conclusion is sweeping, but while the example is carefully 
constructed, it is not contrived. In particular, it does not represent a 
“special case” dependent on the improbably stark contrast between 
the very rich and the very poor, assumed here for simplicity’s sake, or 
on features unique to unionization as a political issue. (Or, of course, 
on the lopsided 97 percent to 3 percent opinion distribution, which 
simply defines a case that, on the face of it, should be a knockdown 
for the median voter model since an overwhelming majority 
consensus has actually crystallized.) 

Instead, what is critical are the brute implications of a very 
pedestrian fact: that entry into politics (and, for that matter, 
subsequent campaigning) is normally very expensive in terms of the 

time and incomes of ordinary voters. As a consequence of this 
“campaign cost condition,” whenever the generic policy interests of 
all large investors diverge from those of ordinary people (and there is 
certainly no presumption that they should always do so), voters are 
checkmated. As long as money matters importantly, and efforts to 
offset the costs of political activity by pooling resources confront high 
transaction costs or other obstacles, including overt repression, the 
electorate can shake, rattle, and roll. But it cannot float an alternative 
of its own to force the issue onto the agenda—even if, as in this case, 
the majority comprises an overwhelming 97 percent of the electorate. 
By virtue of what my earlier essay summarized as the “principle of 
noncompetition across all investor blocs,” only investors can compel 
(at least one of the) parties to take up an issue—because only 
investors can afford to pay the high “replacement cost” of 
nonresponsive parties (candidates, etc.).- 

Does the campaign cost condition imply then that elections go 
automatically to the highest bidder, or render electoral outcomes a 
linear function of total spending? Hardly. As will become even 
clearer below, in the analysis of elections with more than one issue, 
what is pivotal is ready access to the comparatively large sums of 
money necessary to mount a real campaign, not necessarily the most 
money. (In light of recent developments in American politics, it may 
be worth raising a yellow caution flag about a related misconception: 
Multiplying the sheer number of parties in the system does nothing 
by itself to solve the conundrum facing the voters. Their situation 
would not improve if there were three, four, five or n parties on the 
ballot. To refer back to my example, only if one or the other of these 
new parties were financed independently of the textile industry, by 
some group that wanted unionization, would the electorate shake 
loose from its golden fetters.) 

One final point about this example merits notice, since it brings us 
to the heart of some of the most important differences between 
median voter models and the investment approach. Note that while 
democracy is failing miserably, no one is being fooled about 
anything. Neither misinformation nor voters’ lack of time nor ability 
to process campaign appeals is relevant here. There is no money, 
hence no campaign appeal. The electorate is not too stupid or too 
tired to control the political system. It is merely too poor. 

Though some rational choice analysts profess exasperation, it is 
convenient to summarize this state of affairs as one in which the 

electorate is “virtually perfectly” informed—while still being quite 
unable to control the money-driven political system. - 


In the example just discussed, ordinary voters desperately want 
something else from their party system, but cannot achieve it. I 
suspect that some complaints that the investment approach assumes a 
passive electorate are really disguised refusals to recognize that real- 
life electorates may often be trapped in such “no (cheap) exit” 
situations. On the other hand, for simple reasons of space, my earlier 
essays said relatively little directly about voters. It may, therefore, be 
helpful to discuss in more detail the roles voters play in money-driven 
political systems. 

To make the basic point as clear as possible, let us consider once 
more a very simple example—an extension of the case just discussed, 
in which a handful of textile magnates controlled all the political 
money. Now, however, in place of the single dominant sector, let us 
picture how the situation might look 50 or so years later, when the 
economy has diversified a bit. We can imagine that a second, capital- 
intensive industry—the oil industry, perhaps—has firmly established 
itself alongside textiles in the local economy. 

Let us further assume that at some point, the handful of oil 
magnates decide to acquire control of the state. One morning, 
accordingly, a new political party, which they finance, emerges. Since 
the oil industry is far more capital-intensive than textiles, its labor 
costs as a percentage of total value added are much lower. The 
investors who control the new party conclude, accordingly, that they 
can afford to support a scheme for, say, company unions, or even, 
perhaps, the organization of 20 percent of the workforce into 
independent (i.e., real) unions. As a consequence, funding suddenly 
becomes available for a party prepared to offer the electorate another 
deal—a “New Deal,” one might say. 

Now consider the situation of the electorate, for whom the long- 
deferred dream of unionization remains, by hypothesis, as attractive 
as ever. As long as the costs of mounting serious campaigns exceed 
sums that the voting majority can readily raise, its only alternative 
(other than abstention or collective self-organization, both here ruled 
out by assumption) is to calculate, along the lines of Kelley’s (1983, 
pp. 11-12) linear model (according to which voters tally up the 

pluses and minuses of each candidate/party and then vote for the one 
with the highest net score), that the proposed “New Deal” is a better 
deal for them. They, accordingly, vote to put the new, oil-financed 
party in power. Here, indubitably, is real voter choice exercised by a 
superbly informed electorate—yet the median is never approached. 
The system goes from 0 percent to 20 percent unionization, and that 
is all. 

Now let us consider how this “New Deal” example can be adapted 
to shed light on problems now widely discussed in the literature on 
real-life political campaigns. In the case just described, as long as 
nothing changes, the capital-intensive party will obviously win 
election after election in a manner reminiscent of the “dominant 
party” scenarios of some “realignment” theories. (Indeed, from an 
investment-theory standpoint, the rise to power of new, dominant 
blocs of industries, or firms, is historically the most common cause of 
realignment, which explains why Burnham and the other realignment 
theorists who have never developed a consistent approach to investor 
blocs have such difficulty pinning down the precise role of the 
electorate in their otherwise very illuminating discussions.)— 

How might the textile party try to reply to break its rival’s hold? 
From the perspective of comparative political history, the number of 
likely strategies does not seem enormous. First of all, in the spirit of 
the maxim that the best defense is a good offense, conservative 
parties facing this kind of pressure almost invariably begin a 
relentless campaign of vilification directed against their opponents. In 
the intellectual equivalent of radio jamming, they hammer away at 
the principles and the leaders (in some cases, even the dogs of the 
leaders: witness FDR’s dog Falla) of the opposition with virtually any 
argument that seems likely to fly. Sometimes their campaigns focus 
on rival values (“freedom” or rather, “Freedom,” is said to be in 
danger, or the Constitution is declared to be at risk); in other cases, 
the goal is lauded, but the means are scorned, while charges of 
corruption resound everywhere. Almost invariably, however, as the 
social temperature begins to rise, previously accepted rules of social 
intercourse fray. In a word gravid with implications, we can 
summarize all this by saying that all sorts of cues—not only the good, 
but the bad, and the ugly—quickly fill the air. 

Such campaigns usually succeed in instilling enough doubt in some 
portion of the electorate’s mind to at least slow down a developing 
mass movement (and they certainly raise the level of investment 

required to stay in the game). In particularly backward regions and 
specially circumstanced voting groups (including, many times in the 
past, at least upper-class women and the conventionally religious at 
every level of society), they sometimes stop agitation altogether. On 
the other hand, the historical evidence also shows that purely 
negative campaigns often are not enough. At some point, another 
strategy often comes into play: Try to change not minds, but the 

Historically, this step leads to a “Heinz 57 varieties” of concrete 
proposals. Sorting them into rough, but illuminating, categories is not 
too difficult. One class of options involves a deliberate decision to 
counter by emphasizing another economic issue (or, obviously, 
issues). From a comparative historical standpoint, perhaps the most 
common contraposition to unionization and similar broad “populist” 
issues has been the attempt to celebrate economic “growth.” 
Depending on time, circumstance, and the business cycle—for the 
historical association of free enterprise with economic growth is far 
more problematic than most contemporary discussions are willing to 
recognize—the textile party could, for example, froth on about the 
liberating possibilities of, say, “supply-side” economics a la Ronald 
Reagan or Jack Kemp. 

More concrete alternatives are also sometimes posed. If an 
incumbent regime dominated by textile magnates is not easily 
imagined as a plausible champion of advanced technology, still, for 
completeness, it is worth observing that, on occasion, investor- 
dominated political parties have emphasized not only state-assisted 
“modernization” or “great leaps forward” in technology (as did, for 
instance, many Fascist groups, Roosevelt’s own New Deal, or Ernest 
Mercier’s Redressement Fran^ais, in the interwar period; or Francois 
Mitterrand’s “Socialists” in the 1980s), but also the introduction of 
modern financial systems (e.g., Napoleon III, who famously availed 
himself of many other appeals as well) as ways of projecting an 
economic appeal.— In other cases, for example, the case of the 
American Populists of the 1890s, or the recent European 
controversies over currency integration, concerns about monetary 
standards have incited major blocs of investors to organize 

Other historically important political formulas of a broadly 
“economic” type include the campaigns for sweeping deregulation, 
lower taxes, and reduced governmental fiscal “extravagance” waged 

in the nineteenth century by liberal parties in Europe and Andrew 
Jackson, Martin Van Buren, and company in the United States; and 
in the twentieth century by Reagan, Margaret Thatcher, and many 
other rightwing leaders. In other circumstances, however, investors 
have also coalesced behind programs of spending on various tangible 
“public goods” such as canals, bridges, roads, or “a navy second to 
none.” How to pay for these programs has sometimes, of course, 
become a troublesome issue. But a historically very popular 
combination appears to be apparently progressive spending programs 
financed, without fanfare, by regressive taxes on their putative 
beneficiaries in the mass electorate.— (Later in this essay, we will see 
how this pattern derives in part from characteristic defects of the 
systems of public deliberation normally evolved by market societies.) 

Though comparatively few electoral analysts pay much attention, 
often such tactics lead to party systems divided at least partially over 
“horizontal” economic cleavages, in which the major national parties 
represent coalitions of investor blocs dominant in different regions, 
sections, or other spatially defined groups.— In France, Japan, the 
United States, and many other countries, a variant of this strategy has 
led investor-dominated, predominantly urban-based conservative 
parties to coddle agriculture to secure an electoral base (a fact which, 
because the link to urban investor blocs is rarely acknowledged, leads 
many electoral analysts to tie themselves into knots trying to explain 
the apparently magical ability of comparatively small numbers of 
farmers to succeed where millions of workers have failed). The case 
of “free trade” or “protection” in Germany, the United States, Great 
Britain, and other countries in the last two centuries is analogous, 
and too well known to require any comment. 

On the other hand, while many American readers may be skeptical, 
it is a fact that such economic appeals rarely suffice for long. As party 
systems decay with, in many cases, the economy remaining stuck for 
long periods far below full employment, economic appeals by 
themselves often become dangerously unreliable. Any 
investordominated party that relied solely on them would be swiftly 
overwhelmed by a tide of triumphant unionization or populist farm 

The anthropologist Marvin Harris (1979, p. xi) has observed that 
groups dominated by the wealthy are usually the most conspicuous 
champions of the importance of ideals and values in political 
practice. - Though I know of no clear-cut statistical inquiries into the 

question, I suspect strongly that he is right, and that what accounts 
for this is the overwhelming incentive conservative parties frequently 
have to change the subject from economic questions to the flag, 
eternal values, or patriotism; or even to foreigners, blacks, or Jews. 

Moves of this sort, which centrally involve “discourse” or 
“rhetoric” (in plain, nonmystifying English: sustained political 
arguments and appeals), have sweeping implications for the level of 
investment required to become a player in the political system. - 
First, as new issues surface, complex, ramified arguments proliferate. 
The threshold of finance required for credible entry and subsequent 
argument into the political system, accordingly, rises markedly. As 
the 1992 campaign illustrates, even nationally known political 
figures, with clearly articulated initial positions on major issues, some 
free TV time, and an 800 number, require really vast sums of money 
once the campaign heats up. (Rarely, however, will the relation 
between money and political success become linear, as many critics of 
the investment approach seem to think.) 

Second, money’s influence on the election now becomes more 
subtle. In part mediated by campaign rhetoric and language, it is not 
only direct in the senses discussed earlier, but indirect as well: not 
only are issues vital to the electorate not being discussed, but other 
issues apparently quite unrelated to pecuniary interests are being 
deployed or emphasized instead. As simpleminded contrasts between 
a pristine “politics of ideas” and a grubby “politics of money” 
dissolve, analysts who try to estimate money’s influence on politics 
(or on voters , who are struggling to make up their minds) by 
attending to, say, direct discussions of economic issues will be almost 
comically mistaken—though only investors will be laughing. And 
statistical studies of the correlation of policy with opinion are very 
likely to be systematically misinterpreted, since the whole point of 
hyping these other issues (which will work if and only if some 
constituency can be persuaded that they are “real”) is precisely to 
raise the apparent correlation, while guaranteeing investor 

Much more could be said about the role political ideas play in 
money-driven political systems. But the above suffices to explain 
Hobsbawm’s observation, in his masterly survey of comparative 
politics, that everywhere in the nineteenth century the generalization 
of suffrage vastly denatured the political rhetoric of the (non¬ 
socialist) parties (Hobsbawm, 1989, pp. 87-88). It should also be 

apparent why an established church is so often connected with 
conservative parties; why, in money-driven political systems like that 
of the contemporary United States, both major parties show strong 
preferences for highly stylized discussions of the economy (e.g., 
abstract talk about “growth” or, when someone wishes to look 
daring, very guarded, highly stereotyped New Deal tub thumping); 
and why so much American political rhetoric concentrates on 
“social” or “cultural” issues that are peripheral to most investors, 
even though most voters indicate in responses to open-ended 
questions that economic issues stand high on their list of concerns. 
Not to mention why, in 1992, all three major candidates flatly 
declined an invitation in the debates to discuss even modest changes 
in the Federal Reserve System.— 

More broadly, it should be equally easy to understand why 
investor blocs in the United States (and, mutatis mutandis, many 
other countries) so often pursue two apparently contradictory grand 
strategies in regard to public opinion. On the one hand, inspired 
sometimes by elaborate normative theories articulated within the 
establishment by opinion leaders such as A. Lawrence Lowell or 
Walter Lippman, and in other instances by much cruder pressures, 
they are quite prepared to force through public policies opposed by 
majorities (or, if “don’t knows” are included, pluralities) of the 
electorate. (Choice recent examples include the North American Free 
Trade Agreement, which free-traders in both George Bush’s and Bill 
Clinton’s administrations pushed forward in the face of polls 
showing strong public opposition; most policy switches that defined 
the Reagan-Bush “right turn” of the 1980s; or the all but incredible 
spectacle of insistent congressional pressure to scale back President 
Clinton’s already anemic proposals for an economic stimulus, in the 
face of polls showing truly gigantic majorities of voters ranking job 
creation above deficit reduction as a priority.)— 

Some of these efforts involve organized (and subsidized) campaigns 
to “marginalize” adverse opinion by blandly redescribing the facts of 
either policy or opinion until the inconsistency disappears in a cloud 
of verbiage. (One example: most of the discussion of America’s “right 
turn” in the 1980s, discussion which also featured that reliable staple 
of the attempted “marginalization” strategy, vituperative attacks on 
the heterodox.) In other cases, investor blocs and the media simply 
ignore or fudge the inconsistency (as in the discussion of the North 
American Free Trade Agreement or the efforts to cut back the 

Clinton administration’s economic stimulus). Frequently, when 
majority opinion is obviously hostile, no one prints or analyzes any 
polls at all in public. (It is certainly not accidental that major polls 
virtually never report the public’s views about, say, Federal Reserve 
high interest-rate policies; while, in a careful study of New York 
Times polls on aid to the Contras, Lance Bennett has demonstrated 
that the paper simply stopped printing the polls—which ran strongly 
against the U.S. government’s position—as major congressional votes 
approached. — 

On the other hand, American political history is also filled with 
wave after wave of clever publicists who became rich teaching big 
business and politicians the latest refinements of “the engineering of 
consent.” Among these have been, appropriately, the inventor of the 
three-ring circus (and father of the adage that “there’s a sucker born 
every minute”), P. T. Barnum himself, who served as a Republican 
state legislator and mayor of Bridgeport, Connecticut; any number of 
journalists and publishers, from Thurlow Weed to Warren G. 
Harding (the genial newspaper publisher from Marion, Ohio, who at 
least once recommended the use of Gatling guns to quell labor 
unrest); and some fabulously successful retailers (including John 
Wanamaker, chair of the Republican National Finance Committee in 
the late nineteenth century). More recently, an army of handsomely 
remunerated “public relations consultants” has taken the field, from 
Edward L. Bernays (an American nephew of Sigmund Freud) and Ivy 
Lee (the man who told John D. Rockefeller to hand out dimes to 
children) at the turn of the century, to more gemiitlich bamboozlers 
in the last decades than can be conveniently enumerated.— 

The message of virtually all of these eminently respectable 
gentlemen (all, so far, have been men, though women are now 
becoming increasingly prominent in the “profession”) consists of 
variations on a single theme: that often it is easier and, in the long 
run, cheaper, to change mass opinion than to brush it aside (Bernays, 

Such public relations activities, and the simple fact that, as 
Ginsberg recently emphasized, even dictatorial regimes will 
sometimes find it in their interests to appear to court public opinion, 
almost guarantee that some positive correlations will exist between 
public policies and mass opinion in most historical periods (Ginsberg, 
1982, pp. 8-9). Given that politicians still have to talk about 
something, even if debarred by their dependence on investor blocs 

from addressing many issues most important to voters, we can be 
quite certain that elections, and scholars of elections, will inevitably 
celebrate the idea of such correlations. 


We thus arrive at a first, preliminary statement from a practical 
research perspective on how to tackle questions of mass voting 
behavior and actual campaigns in political systems like that of the 
United States, where most of the population is very weakly organized 
and a minority is almost hyperorganized. Clearly the initial, and most 
critical, task is to form a coherent picture of bloc formation within 
big business (“major investors”) as an election approaches. Once this 
is achieved, the next problem is to relate these blocs (and their 
associated policies) to candidates and parties (if reasonably 
comprehensive campaign finance records are available, an application 
of the “Golden Rule”—to see who rules, follow the gold—can help 
greatly to resolve these problems, though I would caution against 
excessively mechanical applications of this dictum).— 

By paying careful attention to the slogans, buzzwords, and oratory 
that constitute the collective deliberative process—such as it is—of 
political campaigns, one then tries as best as one can to sort out the 
signals that are being sent to the electorate. (This step is a rough, 
linguistic equivalent of tracing campaign financing. It is an area in 
which current measurement practices leave much to be desired.) If the 
problem is finally to explain voting behavior, then the last stage of 
the inquiry involves analyzing how voters draw on their own 
particular interpretative resources, which are very closely related to 
their particular forms of social activity (and thus, as discussed below, 
differ radically from the cognitive activities assumed in neoclassical 
economies in general and “rational expectations” in particular) to 
reach a decision. 

In practice, these last steps can be accomplished in a number of 
ways. But empirical studies of voting behavior, I think, would gain a 
lot from closer acquaintance with the practice of writing “history 
from below,” as George Rude, E. P. Thompson, or a few members of 
the (overrated) Annales school have attempted to do. In sharp 
contrast to most conventional “public opinion” analysts, these 
historians take pains to disentangle elite from mass opinion and to 
analyze the latter in its own right. They pay great attention to subtle 

differences in the flow of information within and between social 
classes, racial and ethnic groups, political institutions, and gender 
hierarchies, and to how various groups experience the same events. 
Precisely who reads which newspapers or books (or watches which 
TV programs), along with the interpretative theories historical actors 
bring to bear on these experiences, not to mention who subsidizes 
what, and how all of this changes over time, all figures in their 

One strand of contemporary voting research deliberately bends 
over backward to avoid the great pitfall of all such inquiries: the 
likelihood of inadvertently putting words into people’s mouths and, 
without meaning to, mistranslating popular culture into familiar 
(elite) viewpoints. Relying exclusively on open-ended questions, 
Stanley Kelley has shown that voters’ decisions in two-party races can 
be predicted with remarkable accuracy (more than 80 percent in most 
elections, within at least respectable hailing distance of eclipse 
studies, the stock social science example of a good theory) by 
attending to what voters volunteer they like and dislike about 
candidates and parties (Kelley, 1983). Though he does not refer to it, 
Kelley’s “linear model” approach to voters’ decisions is supported by 
a substantial psychological literature on decision making. His 
findings, in addition, have been extended by John Geer (1988, 1991a, 
1991b, 1992), who has also shown empirically that a number of 
plausible objections to the method—for example, that it might 
disproportionately favor articulate or educated respondents—are 
invalid. Additional buttressing comes from two sociologists who 
independently developed what amounts to virtually the same praxis 
(Ajzen and Fishbein, 1980).— 

Both Kelley and Geer stress their conviction that voters’ decisions 
on the smallish list of considerations that actually appear to move 
them are importantly affected by campaigns, the media and other 
influences. From an investment theory standpoint, this sounds exactly 
right, and while one would like to explore the point in detail, there is 
no reason to quarrel with their empirical results. Indeed, I regard 
their analyses of recent elections as entirely consistent with my own 
studies of the behavior of investor blocs in those elections, 
particularly of the way the austerity policies sponsored by 
Democratic investor blocs have crippled the party’s mass appeal. — 

But this view of voters, political campaigns, and public discussion 
raises a fundamental question. Kelley’s and Geer’s research with 

open-ended questions shows that most ordinary voters are definitely 
not passive spectators of electoral contests. At least during 
presidential elections, most are certainly not voting randomly, or on 
the basis of “off-the-top-of-the-head” whims, as other analysts have 
sometimes suggested. Many try rather hard to make sense of 
campaigns. Despite the publicity about alleged “single-issue voters,” 
almost all cast their ballots on the basis of more than one issue.— 

On the other hand, this research, along with other studies, suggests 
quite a mixed picture about the overall consistency and coherence of 
the electorate’s views. For example, in sharp contrast to political 
scientists, a large majority of the population apparently finds it very 
plausible that the rich and powerful dominate the political system. At 
the same time, however, they “rally ’round the flag” and give many 
responses to other questions that are often jarringly inconsistent with 
this viewpoint. While one could perhaps redescribe this behavior to 
reduce the impression of incoherence, it is obvious that the American 
electorate is light years from the case discussed at the outset of this 
essay, in which only the sheer existence of the campaign cost 
constraint prevents aroused voters from controlling the state.— 

But how is it possible to square the evidence of intelligent, goal- 
directed behavior on the electorate’s part with the persistence of so 
much ambiguous and contradictory thought about politics? Or, to 
make the question as pointed as possible by raising the level of 
generalization, how is persistent, “systematic error” reproduced in 
social systems that is consistent with the historical and contemporary 
evidence regarding both investor bloc strategies and voters’ behavior? 

This is the real question raised by McKelvey and Ordeshook’s 
critique of my earlier essay. Their use of rational expectations to 
analyze “whether incomplete information precludes effective 
competition among groups, as Ferguson suggests” is really an 
argument that systematic error of this sort should not occur on what 
are, essentially, theoretical grounds (McKelvey and Ordeshook, 
1986, p. 912). Because their case is the polar opposite of mine, it is 
very helpful to consider their argument in detail: 

Our definition of an equilibrium here is inspired by recent attempts at incorporating 
considerations of imperfect information into economics. Just as voters are unlikely to 
be informed about the details of candidate platforms, consumer-investors are not 
likely to satisfy, even approximately, the information assumptions of neoclassical 
microeconomics. The rational expectations hypothesis assumes that consumers and 
investors condition their decisions on a belief about how true states are related to 

observed signals (e.g., prices). In equilibrium, they must be acting optimally, 
conditional on their beliefs, and these beliefs must be consistent with what they 
observe; otherwise, there is additional information available that might change their 
decisions. (McKelvey and Ordeshook, 1986, p. 914) 

McKelvey and Ordeshook therefore attempt to analyze a process 
of expectation formation and verification that teaches citizens “to 
vote correctly in terms of their self-interests by using relatively 
costless sources of information” (McKelvey and Ordeshook, 1986, p. 

They proffer two models which they suggest lead to plausible 
reconstructions of actual voter practices. The first, which they admit 
assumes rather a lot, postulates that uninformed voters know exactly 
where they usually sit in relation to the entire distribution of voter 
opinions (while possessing an internalized sense of self-discipline 
worthy of Saint Ignatius of Loyola and a strong, intuitive sense of 
stochastic processes).— By tracking a series of polls showing how 
various candidates fare over time, voters initially ignorant of where 
candidates stand on an issue spectrum running from left to right learn 
to recognize which candidate is nearest to them. By eventually 
matching up with the right candidates, voters force the candidates to 
move to the median. 

McKelvey and Ordeshook’s second model, by contrast, appears to 
assume much less about the voters. Accordingly, it seems on the 
surface much more plausible. Essentially, they suggest that by paying 
careful attention not only to polls, but to endorsements from 
reference groups and similar campaign announcements, voters can 
find out which candidate is nearest them. This, McKelvey and 
Ordeshook argue, will again force candidates to the median after a 
while, even though all that voters know about the candidates is who 
is closest to them, not what they stand for, or even what the precise 
issues in question are (McKelvey and Ordeshook, 1986, p. 933-4). 

As in many parts of economics where rational expectations has 
been tried, the argument is ingenious and stimulating, at least up to a 
point. But also like many parts of economics, including those 
concerned with stock prices (once considered the area of the theory’s 
greatest success, but now marked by many negative appraisals and 
even recantations of onetime champions); foreign exchange markets; 
many macroeconomic adjustment questions; and asset market 
bubbles in the United States and Japan, their ultimate conclusions 
have a distinct air of Through The Looking Glass.— 

To anyone sensitive to the Niagaras of on-the-record cash that now 
swirl indubitably around Washington and state capitals, for example, 
McKelvey and Ordeshook’s argument appears more than a little 
quixotic. While rational expectations does not (as sometimes 
supposed) imply perfect foresight on everyone’s part, the claim 
certainly does entail what might be termed perfect foresight on 
average; i.e., a random distribution of hits and misses nestling around 
the theoretically true mean value of whatever one is trying to predict. 
This is why the argument implies an absence of systematic error 
(Begg, 1982, pp. 29 ff). 

Thus, if the Cal Tech analysts were correct in arguing that voters’ 
rational expectations normally ensure the triumph of the median, it 
would be pointless for the average (self-interested) investor to 
contribute to political campaigns at all. The expected value of 
contributions, on average, would be zero, because democracy would 
be working, and the investment theory would be wrong. Investors, 
who must perforce also be assumed to be acting with rational 
expectations, would know it, and would not contribute. (Note that 
since McKelvey and Ordeshook’s principal models work because 
voters use cues to cut through the fog of political campaigns and 
inform themselves, investors do not need to contribute to protect 
themselves against contributions by rivals—when the median decides, 
the median decides.)— 

But the gravest problems with their argument emerge when it is 
examined in the light of the textile magnates/pro-union majority case 
already discussed above. Though their argument is, in effect, designed 
to dispute it, McKelvey and Ordeshook completely fail to confront 
the campaign cost condition. Their model simply assumes away the 
problem that the textile example highlights: that, somehow, the 
candidates are able to get on the ballot and continue finding the 
resources to stay in the race to the finish. 

In effect, their argument presupposes that money grows on trees 
or, perhaps, that the leftmost candidate is running some as-yet- 
unknown form of green campaign that burns something other than 
money for fuel. If there is no campaign at all, their case falls 
completely apart, since informed voters would have nothing to 
respond to and the candidate would not appear in the polls. (It may 
be instructive to recall that even Jerry Brown kicked off his now 
legendary 1992 campaign with widespread national name recognition 
worth, in effect, millions of dollars. He also spent an additional $8 

million before he was emulsified by the Clinton campaign’s lavishly 
financed TV blitz—and his own mistakes, but mostly the TV blitz— 
in the New York primary.)— 

The critical realignment case discussed earlier also qualifies as a 
disastrous counterexample of why, in the real world, the ability of 
the voters to recognize which candidate is nearest to them does not 
lead to an iterative process in which all, or indeed, any candidates 
have to converge on the median. (Recall that the “New Deal” 
example led only to 20 percent unionization, and no more.) To get to 
the median, candidates have to be able to go to the median. But 
unless they can float not only freely, but free, over the political 
spectrum, they can’t afford to do much travelling. Indeed, in a world 
where money matters, they can’t even pack their bags without seeing 
their receipts fall off literally with the speed of light, in the case of 
wired funds. 


McKelvey and Ordeshook’s disregard of the campaign cost condition 
is aided by an important equivocation. Their exposition equates 
voters’ reliance on rational expectations with the use of “all 
available” information. While this formulation is common in the 
literature, the best accounts carefully note a major qualification: that 
the “available” information is free or obtainable at negligible cost. As 
an exceptionally lucid statement of the view concedes: 

Improving the quality of information about the structure of the economy will generally 
be a costly activity which will be pursued only up to the point at which marginal 
benefits from better information equal the marginal costs of obtaining it. Thus it is 
unlikely that it will ever be profitable or rational to obtain complete information. 
Without a more detailed examination of these costs and benefits, it is hard to decide 
how much information will be collected. While the assumption of any particular 
information is therefore arbitrary, many models implicitly assume that the relevant 
information set is precisely the widely available public information used by economists 
in empirical specification of the model itself. (Begg, 1982, p. 67) 

That is, what makes expectations “rational” is not that they 
incorporate all potentially available information, but that they 
incorporate all affordable information. As Begg goes on to underline: 

By a Rational Expectations equilibrium we then mean a path along which individuals 
cannot improve their forecasting by using the information which they cheaply acquire. 

(Begg, 1982, p. 69.) 

By eliding this point, McKelvey and Ordeshook brush aside all the 
differences in the real-life political economy of information that are 
created by social class and education, or one’s slot within the 
industrial structure, and the rather obvious “public good” character 
of much political information (to be discussed shortly). By 
assumption, in other words, and not by any compelling evidence or 
reasoning, voters are put on the same footing as investment banks. 

Since McKelvey and Ordeshook’s exposition relies heavily on the 
notion of a “poll,” and then quite deliberately elongates that concept 
into the still broader idea of “cues,” it is important to observe that 
their case depends absolutely on the existence of a neutral source that 
freely supplies voters with unbiased polls and other “cues” 
throughout the campaign. Along with the neglect of the campaign 
cost condition, and the implicit confusion of “affordable” with 
“available,” this last point gives the game away. It is not simply that 
the use voters would have to make of the polls is, practically 
speaking, computationally impossible and conflicts with virtually 
everything that is known about the logic of everyday inference.— Nor 
is it that rational expectations as a general theory of cognition is 
incompatible with the results of contemporary empirical research on 
human judgment and reasoning—though, as we shall see, the 
implications of this fact are indeed striking.— 

From the standpoint of the investment theory, the most profound 
problem with their argument is that no such neutral, “Archimedean” 
point exists in the real world’s political economy of information. 

This fact comprises at least half of the answer to the question 
about how “systematic error” arises and persists, so the argument is 
worth tracing in detail. We are all aware that ever since that annus 
mirabilis of American party politics, 1896, the New York Times has 
promised readers “all the news that’s fit to print.” Unfortunately, it is 
a fact that on all too many occasions—e.g., the Bay of Pigs, the 
notorious transfer of Raymond Bonner for his politically incorrect 
reporting on Latin America, or the articles on local politics that 
appear to have occasioned the departure of Pulitzer Prize-winning 
columnist Sydney Schanberg—the paper deemed unfit to print 
information that would have been of great interest to many voters. (It 
is also a fact, and a very interesting fact, that no other major media 
outlet picked up the torch when the Times let it fall.) Independent 

analysts have also raised important questions about the paper’s 
coverage of two very important recent national controversies: the 
North American Free Trade Agreement and national health care.— 

Considering McKelvey and Ordeshook’s uncomplicated confidence 
in polls, it is worth recalling Bennett’s penetrating demonstration of 
the Times’ manipulative coverage of public opinion about Nicaragua. 
One might also note the many years the same preeminent journal 
spent touting Ronald Reagan as one of the most popular presidents 
in American history—a claim which it abandoned only long after 
evidence to the contrary had been widely publicized. Then there is the 
matter of its improbable, but nonetheless reiterated, claims that 
higher participation by nonvoters would not have affected the 
outcome of 1988 and other presidential elections, which I believe 
played a role in various prenomination struggles within the 
Democratic Party in 1992.— 

Even more telling against McKelvey and Ordeshook’s case, 
however, is the simple fact that the Times and the rest of the U.S. 
prestige press rarely cover endorsements, or other politically 
significant activities of most major investors. (They do devote some 
space to political endorsements by movie stars and pop singers.) 
Unless major party campaigns choose to publicize (a select few of) 
their business supporters for special reasons, as for example, the 
Clinton campaign did in 1992, at best the major media provide very 
general, “no fault” campaign finance analysis. Neither do they cover 
the Business Council, the Trilateral Commission, the Council on 
Foreign Relations and other influential investor-dominated 
organizations in any detail, though the latter two, at least, must be 
well known to many leading media figures, since so many have been 
members. This pattern of benign neglect also extends to most 
research institutes, think tanks, foundations, and other places where 
investors, scholars, and journalists, if rarely median voters, converge 
to formulate policy proposals. Save when they are financed by groups 
that are pariahs even to major blocs of investors in the media (e.g., 
some, though far from all, foreign interests), journalists will cover the 
scholars, but not the donors who may or may not be gratefully 
acknowledged in the annual reports and publications of the 
institutions concerned. Other “special interests” such as unions 
occasionally receive coverage, but little of it is likely to be helpful to 
voters, particularly if they are suspicious of the official union 

But this unhappy catalogue does not even hint at the true 
dimensions of the problem with reliance on the media for “polls” 
(and other cues). Consider just the relatively clear-cut case of real 
polls. For all the questions that cluster about the Times’ use of 
opinion polls in its news coverage—and there are many more than 
there is space here to mention—it is important to remember that the 
actual CBS /Times polling operation is a model of care and 
professionalism. Real care is taken not to cook the questions; the 
staff is sensitive to question wording, interviewer, and order effects; 
and requests for fuller information are readily and courteously filled. 

Apart from Gallup and a few other leading surveys, the same 
cannot be said about most other polls published in the media. 
Questions are frequently slanted in any number of ways both in 
primaries (where, it often seems, almost anything goes) and general 
elections. Candidates who should be included in surveys are not. 
Potential candidates and noncandidates who shouldn’t be included 
are. (We pause here in memory of frustrated 1992 Democratic 
presidential hopeful Larry Agran, and note that in the early stages of 
the New Hampshire primary, his poll numbers, but not his press 
notices or fund-raising totals, were little different from those of, say, 
Bill Clinton. We also underline the fact—calamitous for McKelvey 
and Ordeshook—that in this instance, as in many others, newspaper 
editors were sometimes willing to admit in public that both their 
coverage and their polls were affected by candidates’ success in 
raising money.)— 

Outrageously loaded questions about issues and referenda are 
common even in very respectable newspapers (and are not unknown 
in even the “name brand” polls). Results are frequently published 
with no indication of sample size, the exact wording of the question, 
or hints about what other questions preceded it. While one would 
like to believe that these horrors are a consequence of simple 
incompetence, often they are not. Studies of journalism content 
confirm what is suggested to me by my own archival work and 
firsthand acquaintance with many “analysts” in the “business”: that 
newspapers’ coverage and use of polls is usually correlated with their 
support for particular candidates. - 

In general, what is true of polls holds for all the rest of the “cues” 
voters often rely on. In terms of a critical approach to rational 
expectations, what is problematic is not merely the empirical fact that 
voters have often paid demonstrably inordinate attention to the 

ethnic origins of candidates, or their religion, or whether they can 
claim the title “Dr.”, or are listed first on the ballot, or irrelevant 
traits of personality, character, facial features, or even their names. (I 
recall an Ohio Senate candidate named John Kennedy who received 
over a million votes, as well as the legendary deal Nelson Rockefeller 
struck with the Hatters Union to install one Frank D. Roosevelt, Jr. 
on the Liberal line to siphon votes from Frank O’Connor [Kramer 
and Roberts, 1976, pp. 317-19].) 

The truly mortifying circumstance is that all through American 
history, voters have received all kinds of institutional encouragement 
to rely on such cues. Even the prima facie absurd ballot position and 
same-name cues can be and have been systematically manipulated by 
parties, newspapers, and investor blocs, in many instances for years. 
The same holds for the generous tolerance these same groups— 
parties, media, and investor blocs—have so long extended to the 
venerable practice of religious and ethnic “balancing” of tickets by 
political parties whose top leadership indubitably and literally is or 
was “in the money”; to the way the contemporary Democratic Party, 
which should probably take out formal membership in the 
Investment Bankers Association of America, disguises itself as a 
congeries of more politically correct and far less affluent “special 
interest” groups; and to the widening practice among Republicans of 
grabbing for a “moderate” label by talking up “choice” or, 
occasionally, gay rights. In some of these cases (e.g., ballot position 
and same-name candidacies), the promotion of the cue may be 
explicable, but plainly amounts to encouraging irrationality, if that 
protean term is to have any meaning at all. In other cases, the cue 
arguably (the rubber quality of this qualifying term points to a major 
part of the problem) made sense once, or made sense in special, 
limited circumstances, but has long since deteriorated into a complex 
fraud that, however, still retains (some) effectiveness, particularly as 
long as the media wink at the practice.— 

McKelvey and Ordeshook’s claim that endorsements are an avenue 
for voters to obtain cheap information is equally flimsy. We have 
already noticed most endorsements fail to make the papers, but there 
are a variety of other problems with this suggestion. In money-driven 
systems, endorsements are frequently sold and bartered by both 
businesses and unions, as a variety of striking cases from recent 
Democratic primaries can illustrate. Endorsements can also be 
affected by a host of considerations that are clearly irrelevant to 

voters’ interests in the best possible “signal” value. For example, 
strategic silences by interest groups are very common, but virtually 
impossible for voters to “read.” Neither would it be a very good idea 
for average voters to try to “go to school” on their more affluent 
compatriots’ voting preferences, as McKelvey and Ordeshook suggest 
at one point, unless they enjoy, for example, regressive taxes.— 

The cumulative effect of all these influences defies straightforward 
quantitative summary. But, in general, there is no reason either 
empirically or theoretically to believe that the media do anything but 
exacerbate voters’ problems in obtaining and evaluating reliable 

We can, for example, dismiss the still-fashionable notion that the 
media have “few political effects.” Particularly if one gives up silly 
1984 notions of Big Brother controlling everyone at election time, 
and thinks in terms of marginal influences on various percentages of 
the electorate (Robinson, 1974), a wave of new studies suggests that 
this old chestnut is absurd. (Some studies suggest that the voters most 
susceptible to media influence are usually those who know the least, 
which, interestingly for money-driven political systems, turns out to 
be precisely those who watch the most TV. These are mostly middle- 
class and lower-middle-class voters, whose opinions as a result 
resemble not those of their similarly circumstanced compatriots, but 
of upper-class voters who do not watch nearly as much television.) - 

As Erik Devereux has observed, for all the rodomontade about 
journalistic independence, what might be termed the “practical party 
identification” of newspapers and other media (indicated, for 
example, by which party’s presidential candidates are normally 
endorsed; though these are often important less in their own right 
than because they have been shown to be correlated with other 
aspects of coverage [Wilhoit and Auh, 1974]) is at least as stable and 
predictable as analysts of electoral behavior used to believe individual 
party identifications were.— 

From an investment theory standpoint, none of this is surprising. 
In the United States and most other advanced postindustrial societies, 
most major media are privately controlled and a wave of pressure for 
deregulation is leading to the erosion of the few state-supported 
systems that still exist. As a consequence, one can generalize the 
investment theory’s “principle of non-competition” across all 
investor blocs within the party system into a “black hole” maxim 
applicable to the public sphere as a whole under “free enterprise”: 

Just as large profit-maximizing investors in parties do not pay to 
undermine themselves, major media (i.e., those big enough to have 
potentially significant effects on public opinion) controlled by large 
profit-maximizing investors do not encourage the dissemination of 
news and analyses that are likely to lead to popular indignation and, 
perhaps, government action hostile to the interests of all large 
investors, themselves included. 

This does not imply that such media will not print some “bad” 
news—a newspaper that reports none at all is likely to lose 
credibility. Nor, as emphasized by a variety of recent empirical 
studies of politically significant differences within the media, does the 
claim imply that the press cannot be critical. It can, and it will be 
critical, to the point of destroying presidencies, when major 
differences within investor blocs are involved, or, of course, when 
mobilizing against anti-investor groups. (As the recent upsurge of 
corporate-backed lawsuits and subsidized studies of “bias” in press 
coverage of oil spills, Vietnam, and other hot topics attests, however, 
rival investor blocs can hit back hard.)— 

But all this “diversity” is diversity among large investor blocs. 
While greatly underestimated in contemporary social science, it will 
not necessarily do much for the average voter. Unions, the poor, and 
other groups who are not major investors cannot count on the press 
to present their cases. Indeed, since so many political arguments turn 
ultimately on (mostly implicit) judgments by voters of the net effects 
of various complicated policy options, a profit-maximizing media 
often can readily help transform an unorganized electorate into a 
disorganized one by a variety of very simple techniques: By hyping 
estimates of the magnitude of the benefits of particular policies; by 
eliding questions of costs (a factor, probably, in the frequent 
association of “progressive”-sounding policies with regressive 
taxation mentioned earlier, and an all-but-universal practice within 
the U.S. press, in regard to Reaganomics during most of the 1980s 
[Hertsgaard, 1988]); by practicing a version of “confirmation bias,” 
that is, the tendency to dwell disproportionately on cases favorable to 
one’s pet theory (e.g., cases in which “free markets” produce 
economic growth or “democracy” [cf. Therborn, 1977, for a 
devastating empirical critique]); or by framing a wide variety of 
spurious “contrast effects” (for example, by a simple failure to cover 
interest groups lined up behind a preferred policy option, creating the 
impression that protectionism, but not free trade, is an issue 

promoted by peculiarly narrow “special interests.)”— 

As a consequence, all sorts of subsidized misinformation will be 
circulating in the press, even in regard to major public issues that 
appear to be “well covered.” In the political equivalent of Gresham’s 
law, bad information repeated by most of the major media may even 
drive out good information, and—via “Asch effects,” “spirals of 
silence,” or simple fear of ridicule—sow additional public 

But, it may be urged in response, would it not, accordingly, be 
profitable for some individuals to attempt to organize new enterprises 
to improve the quality of the information and analysis available to 
them? Here, I fear, the answer is obvious, if rarely incorporated into 
empirical democratic theory. 

Of course it will (or, as will momentarily become evident, might). 
That is why my original essay on the investment theory included the 
passages that McKelvey and Ordeshook take special exception to (p. 
934) on the importance of government policy toward the secondary 
organization of the citizenry—toward unions, cooperatives, etc. 
Precisely because these organizations have such revolutionary (in 
many senses) potential, governments controlled by large investors 
have always been extremely sensitive to their political activities. That 
is why the history of labor or agrarian protest cannot be reduced to a 
chronicle of attempts to raise wages or farm prices. It is also part of 
the reason why in so many parts of the world, including the United 
States, the specter of honest, free trade unions arouses so much 
passion—and brings forth such strenuous efforts from major 
investors and governments to raise the costs of starting or 
maintaining such movements. And the success of this repression in so 
many parts of the world is probably the major reason for the 
comparative failure of voter control in most existing states.— 

In the case of new newspapers, additional considerations are 
relevant. Ginsberg’s historically sensitive discussion of the role of 
advertising (paid for, or course, by other investors) in reducing the 
newsstand and subscription prices of newspapers and magazines 
helps greatly to explain why almost all new publications that focus 
on politics are subsidized (Ginsberg, 1986, pp. 135-37). As Curran 
documents, really aggressive papers have historically faced all sorts of 
other transaction costs, including (often groundless) libel suits and 
police harassment (Curran, 1982). And if, as has not been likely since 
the mid-nineteenth century, the owners successfully thread their way 

around all these hazards, at some point they begin to think like major 
investors themselves. As with the once “populist” Scripps-Howard 
chain, interest withers in the original mission (Lundberg, 1946, pp. 

From a purely theoretical standpoint, in addition, the public’s 
prospects in a free market for information peopled only by profit- 
maximizing producers and totally self-interested consumers are even 
bleaker than indicated by existing discussions of “imperfect markets” 
for information.— In strict, neoclassical logic, for political 
information such as we are considering, a market is unlikely to exist 
at all. 

Perhaps the most convenient way to demonstrate the point is to 
contrast two cases: First, that of a newsletter that accurately predicts 
the stock market; second, that of a magazine that attempts to inform 
voters about the political activities of the very same businesses, and 
perhaps, their relations with high government officials. The first has 
an obvious market and may expand rapidly. People will buy it, read 
it, invest on the basis of its reports, and make money, at least until 
word leaks out. In the other case, however, people buy it, read it, and 
then face massive collective-action problems (Olson, 1971) plus, 
commonly, direct repression and formidable transaction costs. While 
the social value of the information may be enormous, there is, from a 
purely self-interested individual economic standpoint, no reason to 
purchase the magazine at all. All one gets is a headache, accompanied 
perhaps by long-term demoralization/ 


All these influences collectively constitute what might be termed the 
“objective” side of the genesis of systematic error—the part that is 
ecologically external to individual voters. But as was hinted earlier, 
this comprises but half the story. No less important is the 
“subjective” side of this process—what individual voters add as they 
deliberate and attempt to act. 

The literature in experimental social psychology is now quite clear 
that rational expectations, with its reliance on a single, unanimously 
accepted, unambiguous (and quantitatively formulated) true model, 
caricatures the way human perception and judgment actually work. 
Real-life human perception proceeds not only from “the bottom up” 

(by inducing from particulars), but also from the “top down,” (from 
preconceived ideas). Frequently stereotypical, full of “false 
consensus,” “anchoring,” and “halo” effects, and relying extensively 
on “heuristics” of “representativeness,” or “availability,” human 
judgment can be shown to be highly fallible and not self-correcting in 
many clear-cut cases in ordinary life (Hogarth, 1980; Tversky and 
Kahneman, 1974; Nisbet and Ross, 1980). When group pressures 
and values figure importantly, the likelihood of major persistent error 
rises even further, not least because of a raft of perceptual anomalies 
that can seriously distort even simple physical comparisons of the 
relative sizes of everyday material objects (Tajfel, 1981, chapters 5 
and 6). A variety of other “cognitive illusions” also exist, including 
some that may cause special problems for voters.— 

This does not mean that humans cannot respond sensibly to new 
situations. They can, and they do—particularly if they already have a 
clue as to the real nature of the situation they are up against, or if 
somebody takes the trouble to teach them how to respond 
appropriately. But even at an individual level, such efforts are often 
very expensive, in terms of not only money but time, since human 
learning often has a motor aspect requiring some repetition, and 
always involves an appropriate level of emotional commitment. At a 
mass level the real cost of developing and disseminating reasonably 
accurate accounts of how political systems really work is enormous 
(Goodwyn, 1976). Not surprisingly, therefore, empirical studies of 
mass public opinion in history and political science powerfully 
suggest that controversies among elites and older elite theories 
usually have major influence on popular culture (Cf. e.g., Rude 
[1980] or Zaller [1992]; though the latter, perhaps because it draws 
its evidence almost exclusively from the mass communications- 
dominated recent past, is less sensitive to the way these older views 
are sometimes assimilated into independently derived conceptual 
schemas and to developments such as those discussed by Goodwyn, 

The implications of all this for the discussion here can be 
summarized by observing that for all but the very simplest levels of 
human performance, successful human activity is a function of 
culture (Wygotski, 1985; Luria, 1982). But “human activity in 
general” is an empty abstraction. What is real are humans acting in 
particular contexts (including the very abstract contexts of 
mathematics and formal reasoning) with particular tools (including 

the great tool of language itself). As a consequence, without 
deliberate organized effort (which is very costly, since it involves a 
kind of formal instruction), knowledge tends to be “local” and 
domain specific. The so-called “transfer problem” (recognition of A 
should entail recognition of B, by voters and everyone else) is 
ubiquitous—and, normally, solvable only in culturally sanctioned 
contexts (Tulviste, 1991; Laboratory of Comparative Human 
Cognition, 1983). 

Considering that in most real-life systems of public deliberation the 
parts most easily controlled by ordinary voters—their own 
discussions at home or work, for example—are precisely the most 
informally organized, while the rest of the system is normally owned 
and operated by investor blocs of one sort or another, there is 
nothing contradictory in the claim that voters in an ordinary 
language sense usually do the “best they can” even if they only 
intermittently succeed in grasping the essence of a political system 
that few political scientists can describe correctly. As Granberg and 
Holmberg demonstrate, in the United States the quality of political 
information conveyed by the media, parties, and other institutions is 
wretched, even by the standards of other countries—which are 
usually nothing to be proud of (Granberg and Holmberg, 1988). 
Moreover, as many recent studies of political “rhetoric” remind us, 
political commentary is far from a “random” stream of impressions. 
In most cases, it has been skillfully crafted to appeal to its audiences’s 
prejudices and stereotypes—making it precisely the sort of material 
that the literature in experimental psychology suggests is difficult for 
most humans to see through under normal conditions (Bennett, 

Not surprisingly, in such an environment the everyday “theories” 
most voters hold about the political system rarely provide much help. 
Thanks to generations of hard work by investor blocs, most voters 
are usually saddled (this term is carefully chosen) with some high 
school civics textbook version of the median voter model, 
supplemented perhaps by almost endlessly manipulable personality- 
based accounts of high-level decision making gleaned from popular 
novels, television, and, sometimes, the educational system—including 
higher education and, alas, political science textbooks. Ignorant of 
alternative ways of thinking about either the polity or the economy, 
many citizens sometimes appear to possess few general notions about 
politics at all.— 

But however inadequate these everyday theories are, they are 
usually well entrenched. In part, this is because voters, like the rest of 
the human race, approach reality with particular hopes, fears, and 
interests, and with a definite, historically circumscribed knowledge 
base, rather than behaving as statistically unbiased detectors that 
impartially pick up and decode every signal in the environment. In 
part, it is also because many mistakes voters make are luxuriantly 
encouraged by the very processes of social deliberation they are 
attempting to master. 

Not surprisingly, therefore, voters share the general human 
tendency toward “overconfidence” in judgments. They stick with bad 
interpretative theories far longer than they rationally should 
(Hogarth, 1980). Even when everyday life is breaking up, nothing 
resembling impartial hypothesis testing usually results. With the set 
of alternatives all too easily restricted to proposals that grow 
naturally out of the previous era’s elite discourse, good new ideas 
frequently have a difficult time getting a hearing, even from the 
people they could benefit. The problem of building political support 
is compounded by the high costs of inventing serious, credible new 
hypotheses that are worth sticking one’s neck out for, since, as 
Thomas Kuhn noted, even scientists rarely break with existing 
theories without a well-developed alternative to sharpen their 
perception and given them confidence (Kuhn, 1970). And, of course, 
the sheer massive fact of political repression often overrides 
everything else. 


There remains only the argument in the literature on retrospective 
voting as a challenge to the investment approach. At first hearing, 
this view sounds very plausible: Voters may not know or care very 
much about the particulars of governing. But they still should be able 
to decide whether they like what the governing party has brought 
about. Members of the electorate, accordingly, have a perfectly 
sensible basis for casting their ballots. If they like the effects of the 
incumbent’s policies, they vote for him or her. If they don’t, they 
throw the rascal out. As Fiorina has argued: “What policies 
politicians follow is their business; what they accomplish is the 
voter’s” (Fiorina, 1981, p. 12). 

This innocent-sounding proposal, however, suffers from two grave 

drawbacks. The most fundamental is apparent from the 
aforementioned case of the textile magnates confronting a 97 percent 
majority in favor of unionization. I noted then that merely 
multiplying parties did nothing to solve the electorate’s problem. The 
situation with regard to expelling a series of incumbents is similar. 

By installing a swivel chair in the Oval Office, voters can “just say 
no” and ensure a circulation of the elite’s representatives. But in a 
world in which money matters, they do not thereby achieve 
circulation of the elite: If, for example, voters want unions, they still 
need a pro-union party. Otherwise, all they get is a fresh (and 
affluently rewarded) face and timeworn (protextile) policies. Nor is 
this a purely theoretical deduction from airy first principles: As more 
than one electorate in American history has discovered, to ensure a 
break with persistently deflationary macroeconomic policies it is 
essential to find someone willing to try out a genuinely new policy. 
Otherwise, all voters can do is substitute Grover Cleveland (one of 
whose closest advisers happened to be J. P. Morgan’s principal 
attorney, and who himself spent the four years between his first and 
second presidential terms in Morgan’s law firm) for Benjamin 
Harrison (backed actively by J. P. Morgan, Wanamaker, and 
Company), and then dump him for William McKinley (backed by—J. 
P. Morgan, Wanamaker and an almost wall-to-wall coalition of 
finance and industry). Or, as almost happened in 1932, the populace 
will be asked to hail as the alternative to Herbert Hoover the 
honorable Newton D. Baker, Cleveland bank attorney and counsel to 
the Federal Reserve System that was strangling the economy.— 

There is another problem with the notion of retrospective voting. 
Like McKelvey and Ordeshook’s rational expectations argument, the 
notion is remarkably innocent in its approach to the real-life political 
economy of information. For at bottom, the view takes voters’ 
judgments of a regime’s policy success to be essentially incorrigible. It 
thus succumbs to what might be termed the “fallacy of immaculate 

Considering the amount of political commentary that is concerned 
with managing perceptions of past policy, this is difficult to abide. It 
was Friedrich Nietzsche who observed, in his celebrated essay “On 
the Use and Abuse of History,” that a culture’s ability to function 
was essentially bound up with the view of the past it maintained 
(Nietzsche, 1957). In the twentieth century, Nietzsche’s point has 
been seized upon by any number of regimes, think tanks, and 

foundations. They have grasped keenly the logic of making massive 
investments in the rewriting of history—with results visible to all, not 
least in the fluctuating answers recorded by pollsters to questions 
about the reputations of former presidents and candidates, and policy 
questions such as exactly how successful people believe the War on 
Poverty really was, or how the rich responded to the Reagan tax 

Such facts are a warning that eternal vigilance is likely to be the 
least of the costs of democratic control of the state. In politics, as in 
the economy, voters get what they pay for—or else investors do, 
exactly as my original essays argued. 


I am grateful to Erik Devereux and Benjamin Page for helpful comments on earlier drafts; to 
Edward Reed for many discussions of the experimental literature on human perception and 
judgment; and to Edward Herman for drawing my attention to several valuable studies on 
the press. The Henry Adams quotation that opens this paper comes from Adams, 1930, p. 
360; the Acheson quotation is in Cumings, 1993, p. 557, n. 53. 

Some arguments in this appendix date back to my “Deduced and Abandoned: McKelvey 
and Ordeshook’s Rational Expectations-Augmented-Myth of the Median Voter,” paper for 
the Conference on Politics, Information, and Political Theory, February 13-15, 1986; 
Thompson Conference Center, University of Texas at Austin. An earlier version of the 
discussion also appeared under the same title as this essay in a special issue, edited by 
William Crotty and sponsored by the Political Organizations and Parties Section of the 
American Political Science Association, of The American Review of Politics, vol. 14, winter 
1993, pp. 497-532. My discussion of the “black hole” thesis in regard to profit-maximizing 
media is quite different from, but inevitably brings to mind, Stephen Magee, William Brock, 
and Leslie Young’s (1989); we have all, of course, borrowed this attractive usage from 


Adams, Henry. 1930. Letters of Henry Adams, 1858-91. Boston: Houghton Mifflin. 

Ajzen, leek and Martin Fishbein. 1980. Understanding Attitudes and Predicting Social 
Behavior. Englewood Cliffs, NJ: Prentice Hall. 

Barry, Brian. 1970. Sociologists, Economists, and Democracy. New York: Collier- 

Begg, David. 1982. The Rational Expectations Revolution in Macroeconomics. 
Baltimore: Johns Hopkins University Press. 

Bennett, Lance. 1989. “Marginalizing the Majority: Conditioning Public Opinion to 
Accept Managerial Democracy.” Pp. 321-361 in Manipulating Public Opinion, 
edited by Michael Margolis and Gary Mauser. Pacific Grove: Brooks/Cole. 

-. 1992. The Governing Crisis: Media, Money, and Marketing in American 

Elections. New York: St. Martin’s. 

Bernays, Edward L. 1928. “Manipulating Public Opinion.” American Journal of 
Sociology 33:958-971. 

Brody, Richard and Benjamin Page. 1973. “Indifference, Alienation, and Rational 
Decisions: The Effects of Candidate Evaluations on Turnout and the Vote.” Public 
Choice 15:1-17. 

Burch, Philip. 1981. Elites in American History, Vol. II. New York: Holmes & Meier. 
Carvalho, Fernando J. Cardim de. 1992. Mr. Keynes and the Post-Keynesians. 
Brookfield, VT: Edward Elgar. 

Center for the Study of Communication, University of Massachusetts, Amherst. 1993. 

“Images/Issues/Impact: The Media and Campaign 92.” 

Cole, Michael. 1990. “Cultural Psychology: A Once and Future Discipline.” Pp. 279- 
335 in Nebraska Symposium on Motivation, 1989, edited by John Berman. 

Lincoln: University of Nebraska. 

Craig, Douglas. 1992. After Wilson: The Struggle for the Democratic Party, 1920-34. 

Chapel Hill: University of North Carolina Press. 

Cumings, Bruce. 1993. “Revising Postrevisionism, or the Poverty of Theory.” 

Diplomatic History, vol. 17, no. 4. 

Cuomo, Mario. 1993. New York Times September 20. 

Curran, James. 1982. “Communications, Power, and Social Order.” Pp. 202-235 in 
Culture, Society, and The Media, edited by Michael Gurevitch, Tony Bennett, 

James Curran and Janet Woollacott. London: Methuen. 

Cutting, Bronson. 1919. Papers. The Library of Congress. 

Dawes, Robyn. 1988. Rational Choice in an Uncertain World. New York: Harcourt. 
Devereux, Eric. 1993. “Media Coalitions in the 1964 Campaign: A Political 

Investment Analysis.” Working paper 92-38. H.J. Heinz School of Public Policy 
and Management, Carnegie-Mellon University. 

Downes, Randolph. 1970. The Rise of Warren Gamaliel Harding. Columbus: Ohio 
State University Press. 

Downs, Anthony. 1957. An Economic Theory of Democracy. New York: Harper. 
Eiser, J. Richard. 1990. Social Judgment. Milton Keynes: Open University Press. 
Epstein, Gerald and Thomas Ferguson. 1991. “Answers to Stock Questions: Fed 
Targets, Stock Prices, and the Gold Standard in the Great Depression.” Journal of 
Economic History 51:190-200. 

Fairness and Accuracy in Reporting. 1992a. “Special Section on PBS.” Extra 5, no. 4 

-. 1992b. “Campaign ’92 Wrap-up.” Extra 5, no. 8 (December). 

-. 1993. “Update” and “Action Alert.” Extra (October). 

Ferguson, Thomas. 1983. “Party Realignment and American Industrial Structure: The 
Investment Theory of Political Parties in Historical Perspective.” Pp. 1-82 of 
Research in Political Economy, Volume VI. Greenwich, Conn.: JAI Press. 

-. 1984. “From ‘Normalcy’ to New Deal: Industrial Structure, Party Competition, 

and American Public Policy in the Great Depression.” International Organization 

-. 1986. “Elites and Elections, or: What Have They Done to You Lately?” Toward 

an Investment Theory of Political Parties and Critical Realignment.” Pp. 164-88 in 
Do Elections Matter ? edited by Benjamin Ginsberg and Alan Stone. First Edition. 
Armonk, NY: Sharpe. 

-. 1989. “By Invitation Only: Party Competition and Industrial Structure in the 

1988 Election.” Socialist Review 19:73-103. 

-. 1991. “Industrial Structure and Party Competition in the New Deal.” 

Sociological Perspectives 34:493-526. 

-. 1992. “Money and Politics.” Pp. 1060-1084 in Handbooks to the Modern 

World—The United States, vol. 2, edited by Godfrey Hodgson. New York: Facts 

On File. 

-. 1995. ‘“Real Change’? ‘Organized Capitalism,’ Fiscal Policy, and the 1992 

Election.” Chapter 6 . this volume. 

Ferguson, Thomas and Joel Rogers. 1986. Right Turn: The Decline of the Democrats 
and the Future of American Politics. New York: Hill & Wang. 

Fiorina, Morris. 1981. Retrospective Voting in American National Elections. New 
Haven: Yale University Press. 

Geer, John. 1988. “What Do Open-Ended Questions Measure?” Public Opinion 
Quarterly 52:365-371. 

-. 1991a. “Do Open-Ended Questions Measure ‘Salient’ Issues?” Public Opinion 

Quarterly 55:360-370. 

-. 1991b. “The Electorate’s Partisan Evaluations: Evidence of a Continuing 

Democratic Edge.” Public Opinion Quarterly 55:218-231. 

-. 1992. “New Deal Issues and the American Electorate, 1952-88.” Political 

Behavior 14:45-65. 

Ginsberg, Benjamin. 1982. The Consequences of Consent: Elections, Citizen Control, 
and Popular Acquiescence. Reading, MA: Addison Wesley. 

-. 1986. The Captive Public. New York: Basic Books. 

Ginsberg, Benjamin and John Green. 1986. “The Best Congress Money Can Buy.” Pp. 
75-89 of Do Elections Matter ? edited by Benjamin Ginsberg and Alan Stone. First 
ed.; Armonk, NY: Sharpe. 

Goodwyn, Lawrence. 1976. Democratic Promise. New York: Oxford University Press. 

Granberg, Donald and Soren Holmberg. 1988. The Political System Matters. New 
York: Cambridge University Press. 

Harris, Marvin. 1979. Cultural Materialism. New York: Random House. 

Herman, Edward. 1992. Beyond Elypocrisy. Boston: South End Press. 

Herman, Edward and Noam Chomsky. 1988. Manufacturing Consent. New York: 

Hertsgaard, Mark. 1988. On Bended Knee. New York: Farrar, Straus & Giroux. 

Hobsbawm, Eric. 1989. The Age of Empire. New York: Vintage. 

-. 1990. Nations and Nationalism Since 1780. New York: Cambridge University 


Hobsbawm, Eric and Terence Ranger. 1983. The Invention of Tradition. New York: 
Cambridge University Press. 

Hogarth, Robin. 1980. Judgment & Choice. New York: Wiley. 

Josephson, Matthew. [1963]. The Politicos. New York: Harcourt, Brace & World. 

Kelley, Stanley, Jr. 1983. Interpreting Elections. Princeton: Princeton University Press, 

Kramer, Michael and Samuel Roberts. 1976. “/ Never Wanted to Be Vice President of 
Anything .” New York: Basic Books. 

Kuhn, Thomas. 1970. The Structure of Scientific Revolutions. Second ed. Chicago: 
University of Chicago Press. 

Laboratory of Comparative Human Cognition. 1983. Pp. 295-356 in Handbook of 
Child Psychology, Vol. I, edited by Paul H. Mussen. Fourth edition. New York: 

Langer, Ellen J. 1975. “The Illusion of Control.” Journal of Personality and Social 
Psychology 32:311-328. 

Lave, Jean. 1988. Cognition in Practice. New York: Cambridge University Press. 

Lavoie, Marc. 1993. Foundations of Post-Keynesian Economic Analysis. Brookfield, 
VT: Edward Elgar. 

Lee, Martin and Norman Solomon. 1991. Unreliable Sources. New York: Carol 

Publishing Group. 

Lundberg, Ferdinand. [1938] 1946. America’s 60 Families. New York: Citadel. 

Luria, A.R. 1982. Language and Cognition. New York: Wiley. 

Magee, Stephen, William Brock, and Leslie Young. 1989. Black Hole Tariffs and 
Endogenous Policy Theory. New York: Cambridge University Press. 

McKelvey, Richard and Peter Ordeshook. 1986. “Information, Electoral Equilibria, 
and the Democratic Ideal.” Journal of Politics 48:909-937. 

McLean, Iain. 1987. Public Choice. Oxford: Blackwell. 

Miller, Warren and Donald Stokes. 1966. “Constituency Influence in Congress.” Pp. 
351-372 of Elections and the Political Order , edited by Angus Campbell, Philip 
Converse, Warren Miller, and Donald Stokes. New York: Wiley. 

Nietzsche, F.W. 1957. The Use and Abuse of History, translated by Adrian Collins. 
Second edition. Indianapolis: Bobbs-Merrill. 

Nisbet, R. and L. Ross. 1980. Human Inference: Strategies and Shortcomings of 
Human Judgment. Englewood Cliffs, NJ: Prentice Hall. 

Noelle-Neumann, Elizabeth. 1984. The Spiral of Silence. Chicago: University of 
Chicago Press. 

Olson, Mancur. 1971. The Logic of Collective Action. Second edition. Cambridge: 
Harvard University Press. 

Page, Benjamin. 1983. Who Gets What from Government. Berkeley: University of 
California Press. 

Page, Benjamin and Robert Shapiro. 1992. The Rational Public. Chicago: University 
of Chicago Press. 

Page, Benjamin, Robert Shapiro, and Glenn Dempsey. 1987. “What Moves Public 
Opinion.” American Political Science Review 81:23-43. 

Parry, Robert. 1992. Fooling America. New York: Morrow. 

Reed, Edward. 1988. James J. Gibson and the Psychology of Perception. New Haven: 
Yale University Press. 

Robinson, John P. 1974. “The Press As King-Maker: What Surveys From [the] Last 
Five Campaigns Show.” Journalism Quarterly 51:587-594. 

Rogers, Everett M. 1983. The Diffusion of Innovations. Third edition. New York: 
Free Press. 

Rosen, Elliot. 1977. Hoover, Roosevelt and the Brains Trust. New York: Columbia 
University Press. 

Rude, George. 1959. The Crowd in the French Revolution. New York: Oxford 
University Press. 

-. 1980. Ideology and Popular Protest. New York: Pantheon. 

Schattschneider, E.E. 1935. Politics, Pressures, and the Tariff. New York: Prentice 

Schneider, William. 1993. “The President’s Call To Arms.” Boston Herald, February 

Sheffrin, Steven. 1989. The Making of Economic Policy. Oxford: Blackwell. 

Shiller, Robert. 1989. Market Volatility. Cambridge: MIT Press. 

Tajfel, Henri. 1981. Human Groups and Social Categories. New York: Cambridge 
University Press. 

Thaler, Richard. 1992. The Winner’s Curse: Paradoxes and Anomalies of Economic 
Life. Princeton: Princeton University Press. 

Therborn, Goran. 1977. “The Rule of Capital and the Rise of Democracy.” New Left 
Review, no. 103 (May-June):3-41. 

Thompson, E.P. 1968. The Making of the English Working Class. London: Penguin. 

Tulviste, Peeter. 1991. The Cultural-Historical Development of Verbal Thinking. 

Commack, N.Y.: Nova Science Publishers. 

Tversky, Amos and Daniel Kahneman. 1974. “Judgment Under Uncertainty: 

Heuristics and Biases.” Science 184:1124-1131. 

Wall Street Journal. 1992. November 19, p. A16. 

Wilhoit, G.C. and Auh, T.S. 1974. “Newspaper Endorsement and Coverage of Public 
Opinion Polls in 1970” Journalism Quarterly 51:654-658. 

Wygotski, Lew. [Vygotsky, Lev]. 1985. Ausgewaeblte Schriften, Bd. I. Koeln: Pahl- 
Rugenstein Verlag. 

Wypijewski, JoAnn. 1990. “Shirley Christian and the Times on Chile.” Lies of Our 
Times 1, no. 1:14. 

Zaller, John. 1992. The Nature and Origins of Mass Opinion. New York: Cambridge 
University Press. 



1. The interviews with members of the Business Council appeared as part of a special 
series of programs on money and elections. I served as a consultant to the series and 
appeared in several segments. Gregory MacArthur, its producer, kindly made available to me 
full transcripts of the interviews, which I checked against a video of the final program. 

2. The comparison to Perot’s plan was initially encouraged by the administration, until 
the Texan declared against the program. See, e.g., the discussion in chapter 6 in this volume, 
as well as the news coverage in the major media, which is easily available and, to save space, 
will not be traced here unless some particular detail is vital. Many business figures weighed 
in with their various views on the president’s plan soon after he introduced it. But a major 
document witnessing to its support among important parts of big business is the letter 
released by Illinois Congressman Dan Rostenkowski dated May 25, 1993. This is signed by 
some fifty of the largest businesses in the United States and flatly endorses the bill reported 
out by Rostenkowski’s committee, which contained virtually all the parts of the proposal 
that occasioned most of the controversy and were subsequently modified in the Senate. 
Among the firms which enlisted on the president’s side in the alleged class war were 
AlliedSignal, Ameritech, Anheuser-Busch, Avon, BP America, Colgate-Palmolive, Delta Air 
Lines, Dow Corning, Electronic Data Systems, Emerson Electric, the GAP, GenCorp, 

General Electric, General Mills, General Motors, General Signal, Hallmark Cards, 
Honeywell, Hughes Aircraft, IBM, Jim Walter, Kellogg, Levi Strauss, 3M, Marriott, Mars, 
Owens-Corning Fiberglas, Philip Morris, Procter & Gamble, Quaker Oats, Ryder, Sara Lee, 
Southern California Edison, Southland, Tenneco, Time Warner, Walt Disney, and 
Westinghouse. General Electric’s chair attached a brief comment asking for more spending 
cuts, and a few other firms added other observations. 

I suppose it is too much to hope that appending this list of firms will save us from a flock 
of articles and dissertations in the coming years about “Bill Clinton and the dilemmas of the 
autonomous state.” 

3. Measuring the tone of press coverage is in its infancy in the social sciences. All one can 
do is try one’s best to carefully summarize main themes. In this and other essays in the book, 
I have, accordingly, stuck wherever possible to noting truly repetitious themes that I hope 
can command general assent. But see the discussion of media coverage following Clinton’s 
speech in Fairness and Accuracy in Reporting’s very helpful Extra, April/May 1993, p. 8; 
this reviews many programs and articles such as the Washington Post’s “Is Clinton Pitting 
Class Against Class?” of February 21, 1993. This article also quotes David Brinkley’s 
criticism, in a speech to a trucking association after the 1992 election, of the Democrats for 
practicing “long-standing class warfare.” The article also notes that many of the journalists 
making such comments are themselves very affluent. 

University presses are forced to operate in what one school of French historians is wont 
to call la longue duree. Thus some parts of chapter 6 ’s analysis of the Clinton 
administration, and particularly the likely fate of its economic program, that were originally 
written as forecasts have become contemporary history. It may, accordingly, be worth 
mentioning that chapter 6 was essentially completed within a week or so of the president’s 
budget speech of February 1993. At that time I sent to press a much shorter analysis of the 
Clinton program, with a very direct prediction of the likelihood of the dollar difficulties that 
actually materialized in the summer of 1994. This appeared as ‘“Organized Capitalism,’ 

Fiscal Policy, and the 1992 Democratic Campaign,” in Lawrence Dodd and Calvin Jillson, 
eds., New Perspectives On American Politics (Washington, D.C.: Congressional Quarterly 
Press, 1993), pp. 118-39. 

4. This book went to press long before the conclusion of the great debate over the North 
American Free Trade Agreement, and an extended comment on the final outcome is 
obviously out of the question. I daresay, however, that readers of chapter 6 are unlikely to 
find anything surprising about the president’s stance, or those of his allies. 

Note, however, in relation to the Gergen appointment and the Clinton administration’s 
efforts to redramatize itself, the discussion in the Boston Globe, November 12, 1993. There 
Robert Kuttner reports that during the summer of 1993 the administration discussed the 
possibility of pushing for a version of the NAFTA accord that would have contained much 
stronger labor provisions, including one that would have linked reductions in tariffs to rises 
in Mexican wages. A number of major unions were prepared to support the treaty in the 
event the administration opted for this alternative, as were key House Democratic leaders 
such as Richard Gephardt. 

But urged on by, among others, the Democratic Leadership Council, which wanted to 
weaken unions and attract more business support, the Clinton administration rejected this 
approach in favor of one built around an appeal to Republican votes and, of course, massive 
lobbying by the business community. 

I have independently confirmed the gist of Kuttner’s account. My sources add that while 
some American consumer goods producers did support efforts to raise Mexican wages, the 
rest of the business community favored the more sweeping approach the president eventually 
adopted. Is it too much to hope that no one will ever ask again whether the investment 
banking presence in the Democratic Party matters? 

5. See, e.g., a typical comment by William Safire in the New York Times, September 20, 
1993 (referring to the earlier period). Given the multiplicity of editions that the Times and 
most other papers now issue, it is impractical and potentially very misleading to note the 
pages of particular articles in references. Note that when articles are retrieved from 
computer-assisted data banks, there often are no page numbers supplied at all, even in the 
original indexes. 

6. See USA Today, March 6-8, 1992. 

7. Thomas Ferguson, “Money and Politics,” in vol. 2 of Godfrey Hodgson, ed., 
Handbooks to the Modern World—The United States (New York: Facts On File, 1992), 
reviews the main facts and literature that addresses these questions. See also Frank Sorauf, 
Money in American Elections (Glenview, Ik; Scott, Foresman, 1988). There are numerous 
reviews of the PAC literature. See, e.g., Larry J. Sabato, PAC Power (New York: Norton, 
1985). Mark S. Mizruchi, The Structure of Corporate Political Action (Cambridge: Harvard 
University Press, 1992) is another particularly thoughtful contribution, although I would 
disagree with a number of points in his discussion, as well as his reliance on PAC data for 
much, although not all, of his analysis. A particularly unfortunate feature of the recent PAC 
literature is a concentration on congressional elections in the early eighties, when much of 
the business community coalesced in political movements designed to move the U.S. political 
agenda sharply to the right. The discovery by some researchers that this process—which I 
and others wrote about at the time—in fact occurred, along with experimental designs that 
often obscure (weaker, but eventually important) countertendencies, nourishes the view that 
significant political differences within the business community do not in fact exist. 

All students of money and politics, incidentally, owe substantial debts to Herbert 
Alexander, whose publications and data archives are invaluable and quite literally 

The extent to which reality has outstripped the scholarly literature on these questions is 
hard to convey, but one example may be telling. In many parliamentary democracies it is 

now quite common for corporations and investors formally to retain members of parliament 
as advisers for fees. In the United States, on the other hand, it is becoming increasingly 
common for congressional staffers to strike up various arrangements whereby they are paid 
(sometimes through one or another legal dodge, such as “consulting fees”) by interested 
parties. The degree of statistical misspecification in ordinary voting models of politics is thus 
becoming ever more baroque. 

8. The text of every previously published essay in this book has been revised and 
expanded, often considerably, and a substantial amount of material appears here for the first 

Earlier versions of chapters (or parts of chapters) appeared as follows. Chap. 1 : in Paul 
Zarembka, ed., Research in Political Economy 6 (1983); reprinted by permission of JAI 
Press, Inc. Chap. 2 : in International Organization 38, no. 1 (Winter 1984); reprinted with 
the permission of MIT Press. Chap. 3 : in The Journal of Economic History, vol. 44 
(December 1984); reprinted by permission. Chap. 4 : in Sociological Perspectives, 34, no. 4 
(1991); reprinted by permission of JAI Press, Inc. Chap. 5 : in Socialist Review 19, no. 4 
(1989); reprinted by permission of Duke University Press. And in “Unbearable Lightness of 
Being,” in Benjamin Ginsberg and Alan Stone, eds., Do Elections Matter ? (Armonk, N.Y.: 
M. E. Sharpe, 1986); reprinted with permission. Chap. 6 : in Lawrence C. Dodd and Calvin 
Jillson, eds., New Perspectives on American Politics (Washington, D.C.: Congressional 
Quarterly, Inc., forthcoming); reprinted with permission. Appendix : in American Review of 
Politics (Winter 1993); reprinted with permission. 

9. See Lance Bennett, The Governing Crisis (New York: St. Martin’s, 1992) and the 
discussion in the appendix . At a couple of points in his discussion, Bennett asks whether the 
main effect of money in the political system does not consist in bringing about the 
disintegration of the system to the exclusion of larger patterns such as those suggested in the 
various studies in this book (in which investment banks, various multinationals, and other 
definite business groups play major roles even in the Democratic Party). The NALTA debate 
should now have resolved this question. American politics is not simply disintegrating; new, 
historically specific, political coalitions and patterns of policies are emerging. 

10 . Thomas Lerguson and Joel Rogers, Right Turn: The Decline of the Democrats and 
the Future of American Politics (New York: Hill & Wang, 1986). 

Chapter One 

* Readers unfamiliar with this work and the issues it raises may wish to skim over the 
next few pages. Nothing essential will be lost, and the later historical sections of the paper 
should be readily intelligible. 

1. Prank Vanderlip to James Stillman, September 20, 1912, Prank Vanderlip Papers, Rare 
Book and Manuscript Library, Columbia University. On the controversy about the National 
City Co., the Taft and Wilson administrations’ inaction, and subsequent developments in 
defining the relationship between commercial banks and the securities markets, see Lerguson 
(n.d.). I have added the comments in brackets to provide background for non-specialist 

2. The literature on realignments, voting behavior, and party systems is vast. Since 
Lerguson (1986) discusses much of it, and extensively references other discussions and 
bibliographies, this paper will not attempt another inventory of the literature. Also, the 
summary of critical realignment theory which follows sticks closely to the theory’s “core” 
propositions, leaving aside many nuances and disputed points. 

3. Some realignment theorists, including Burnham, Ginsberg, and David Brady, argue 
that effective popular control of public policy is most likely during critical realignments; at 
other times institutional obstacles to effective majorities inhibit the impact of voting on 

public policy. For a more extensive discussion see Ferguson (1986). 

4. Note that with the possible exception of Lichtman (1980), whose closing chapters 
begin an analysis of the role of the business community which could lead toward an 
investment theory of parties, the critics of critical realignment theory draw few general 
conclusions about elections and the control of public policy. They largely concentrate on the 
facts of voting behavior during elections. 

5. For example, Clubb, Flanigan, and Zingale (1980). Such efforts normally also propose 
intensive examinations of the content of public policy. 

6. Ferguson (1986) summarizes the evidence on this score and makes use of data collected 
in Ginsberg (1982) to provide some quantitative evidence of the tenuous and unstable 
relationships between elections and public policy. 

7. For example, Downs (1957a, pp. 247 ff.). 

8. Some friendly critics of an earlier draft of this paper have suggested that Downs’s work 
ultimately takes a more jaundiced view of the possibilities for voter control of the polity than 
suggested here. Now, if consistently maintained, the discussion of “producer bias” in the 
closing chapters of An Economic Theory of Democracy leads toward an investment theory 
of parties. Also, as I suggest elsewhere, other parts of Downs’s work broach important lines 
of argument that could undermine “electoral control” theories. But these sections have been 
almost entirely ignored in the subsequent literature. Even Downs’s own summary of his 
views (1957b) did not develop the “producer bias” arguments at all but instead presented his 
analysis as a more rigorous and modernized updating of quite traditional voting models of 
politics. It is therefore unsurprising that neither reviewers nor the author of an excellent 
general discussion of economic “influence” in politics (Bartlett, 1973) considered such 
efforts essentially “Downsian.” See also the discussion later, on the principle of 
noncompetition and other quite non-Downsian consequences of the investment theory of 

9. It should hardly be necessary to observe that this brief discussion cannot hope to cover 
the nuances of the “socialization” approach or the differences that divide its exponents. For 
a more extensive discussion, see, inter multa alia , Campbell et al. (1960). 

10 . As discussed above; it is surprising that an application of Downs along Popkin and 
associates’ lines took as long to arrive as it did. 

11 . Olson (1971, Chap 1) briefly summarizes the notion of a “collective good.” See also 
the discussion of his work later in this paper. 

12 . Popkin et al. (1976, p. 786); the “simple act of voting” reference is to Kelley and 
Mirer (1974). 

13 . Roemer (1978); note that Roemer restricts his point here to what this paper refers to 
as “major investors.” 

14 . This is technically incorrect. Party competition takes place until investors in both 
parties feel their overall losses from mobilizing voters through appeals that lead to sacrifices 
of vital investor interests exceed the gains that might come from control of the state. But 
since what is at stake are vital interests—such as labor legislation, or perhaps even the 
existence of private property itself—virtually any erosion along these dimensions results in 
massive investor losses. Virtually no investors, accordingly, finance campaigns that involve 
such appeals, and so practically no competition occurs along these dimensions. 

15. For a somewhat untypical case, see the description of the organizational structure 
established to help manage the Rockefeller fortune in P. Collier and D. Horowitz’s book The 
Rockefellers (1976). It should be noted here that this discussion of the advantages business 
enjoys in acting politically cannot be exhaustive. Nor, perhaps more importantly, is it 
intended as a contribution to the growing theoretical literature on the relationship of the 
state and market. Most of the considerations advanced in works like Lindblom (1977) are 
taken for granted here, where the concern is much more concrete. 

16 . For the evolution of modern management structures, see Chandler (1977) and also 
DuBoff and Herman (1980). While they make their argument cautiously, Bauer et al. (1972) 
come close to asserting that large firms do not have reliable cost data—a point which, I 
venture, will find little support in the mass of business history writings. 

Several other observations about this frequently urged position are probably also worth 
making here. First of all, no one denies that lower-level bureaucrats occasionally escape from 
the control of their supervisors in the manner described in Allison (1971) (though later 
analysis suggests his examples may not have been well chosen), or that personality 
differences and other disputes are not endemic in large business organizations. The point, 
however, is that management structures have been continuously redesigned to reach and 
enforce a working policy consensus in the face of such obstacles. When internal divisions 
over basic policy surface in an important case, their consequences are fairly easy to observe: 
there will be visible signs of turmoil in the organization and, often, clear attempts by higher- 
level executives to deliberately take back control. 

My own studies of internal documents and memoranda relating to corporate decision 
making on major public policy issues during the New Deal turned up only a few cases in 
which major issue-related differences persisted inside corporate managements. Where they 
did, the usual procedure was to call a committee meeting to hammer out policy. In this 
connection, see also William Baumol’s observations on the use of operations research after 
World War II to put such decision-making procedures even more firmly in place [quoted in 
Walsh (1970, p. 113)]. 

17 . Strictly speaking, as Olson himself notes, his account of collective action also covers 
altruistic behavior (1971, p. 64). But many politically relevant applications of the theory 
probably require the stronger assumption of self-interest. 

18 . See, e.g., Roemer (1978), which rather clearly assumes that fairly concrete issues of 
work, distribution, and such are sources of frustrations that lead to collective action. 

19 . Many of these cases, including perhaps most of those discussed here, should perhaps 
be more properly described as private transactions which have important external effects on 
the rest of the population. But Olson himself continues to refer to “the group” provision of 
“public goods” in such cases (see, e.g., p. 48, n. 68), and this chapter will follow that usage. 

20 . After more than two decades of work on game and coalition theory, it is rather 
surprising, and cause for some alarm, that this sort of thing continues to happen. Even the 
most elementary acquaintance with the “prisoner’s dilemma” or oligopoly pricing theories 
should make it clear that “perfect competition” in a neoclassical sense is a wholly 
inappropriate assumption for the analysis of many important social outcomes. Like the 
Justice Department’s claim about the American antiwar movement in the 1960s, a confusion 
of such “imperfectly competitive” or interdependent situations with conspiracies reveals 
more about the speaker’s goodwill and clarity of mind than the merits of any actual case. 

It is, after all, a sad day for social science when, for example, Morris Fiorina’s Congress: 
Keystone of the Washington Establishment (1977) has to perform a virtual ritual dance of 
purity in the introduction merely to advance the suggestion that congressmen vote for 
spending programs in part because they want to be reelected. 

21 . Personal communication from Lawrence Goodwyn, who has extensively researched 
this incident. 

22. Lor more details see Lerguson (1984, n.d.) which relies on extensive primary sources. 

23 . See Olson’s (1971) discussion, pp. 24-25, especially n. 42, and p. 48. 

24. This is apparent even from the example Olson uses in presenting his formal analysis. 
He considers the case of a group of property owners lobbying for a property tax rebate. 

Then he sets up the following model. 

T = the rate at which the collective good is supplied; 

Sg = the “size” of the group, “which depends not only upon the number of individuals in 

the group, but also on the value of a unit of a collective good to each individual in the 
group” (p. 23). 

The “group gain” (SgT) = Vg. Now, Vj/Vg = Fj, the “fraction” of the collective good an 
individual obtains; the total gain to an individual therefore is FjSgT. 

For an individual to act, a positive advantage (Aj) must accrue to him or her. 

To use the model to discover how much of the collective good will be supplied, Olson 
therefore analyzes how Aj varies with T. 

Since the first order condition for Aj to be at a maximum is dAj/dT = O, Olson evaluates 

dA, _ dV, _ dC 
dT dT dT 

Now, because 

V, = FAT, 

the right-hand side becomes 

d(F,S g T) _ dC 
dT dT 

For an individual to act, 



> — 


Now, all of this is well and good. But what Olson does next is to argue that, because 
increases in the size of the group drive down Fj, individuals in large groups will not be able 

to meet this condition, which defines situations under which it is rational for individuals 
acting by themselves to bear the whole cost of collective action and, by their action, benefit 
the group as a whole. So, here is a reason, Olson concludes, why large groups will not be 
provided with collective goods. 

But there is clearly something wrong with this analysis. As more than one real estate 
group in recent American history has discovered to its delight, rewriting a proposed tax 
rebate to include half or more of the potential electorate does not automatically reduce 
benefits to itself. Despite Olsons claim that increasing the size of the group should decrease 
individual benefits, such a strategy is often precisely the high road to success. 

In terms of Olson’s discussion on pp. 22-23 of his book, this is to say that Fj does not 

necessarily change as additional property owners are added. Of course, whether collective 
action occurs depends on more than the maintenance of the Fj’s, but they, at least, need not 

pose a problem in a large group. 

Note, however, the differences between this example and the Cournot market case Olson 
discusses on pp. 26-27. In the latter, the demand curve limits total sales, so that increases in 
individual Fj’s really do take directly away from someone else. This distinction is clearly 

recognized by Olson in the next section, which distinguishes between “inclusive” and 
“exclusive” groups (pp. 36-43), but the original claim that increases in group size lead 
directly to lower probabilities of collective action because of changing Fj’s is repeated 


It may also be worth observing that the point at issue here differs from the criticisms of 
Frohlich, Oppenheimer, and Young (1971). Their main argument centered on the possibility 
of introducing marginal cost-sharing arrangements (pp. 146-48). 

25. This is, of course, far from the only problem with the neoclassical approach to 
“aggregate” concentration. 

26 . A good discussion of the U.S. experience in this respect is in Kotz, (1979), though its 
discussion of the New Deal should be supplemented by Ferguson (1984, n.d.). 

27 . For evidence on the CED see Burch (1979); among many sources on the Business 
Council see Collins (1981, passim). The only study known to me that failed to confirm the 
special significance of large financial institutions in major business organizations is Useem 
(1980). But this study included organizations like the National Association of Manufacturers 
(NAM) that formally prohibit financiers from being on the board in the sample it analyzed, 
thus imparting a downward bias to its estimate of the importance of financiers. Of course, 
the NAM is not without significance, but as Burch (1973) observed, the NAM only 
occasionally has represented really large firms. As Ferguson (n.d.) argues, when, as in the 
1930s, the NAM’s national significance increases, it is because a core of large firms has 
subsidized organizational growth. 

28. See Carle Conway to Thomas Lamont, Dec. 2, 1943; Lamont to E. T. Stannard, Dec. 
3, 1943; Conway to Lamont, Dec. 15, 1943; Lamont Papers, Baker Library, Harvard 
University. Conway, the president of Continental Can and a CED activist, asked Lamont to 
intervene with Kennecott Copper. The famous Morgan partner did, and Kennecott increased 
its contribution. 

29. See Olson (1971), e.g., Chap. 4. 

30 . For extensive discussion and references see Bernstein (1950), Fusfeld (1980), 

Goldstein (1978), Ferguson (1984, n.d.), and Zilg (1976, pp. 327-30). What appears to have 
happened to Zilg’s excellent study after its publication underscores this essay’s general 
analysis of the role major investors play in American life. See the chilling discussion in 
Sherrill (1981). 

31 . A close examination of smaller business support for Pennsylvania’s “Little New 
Deal,” I suspect, would be very revealing in regard to the abolition of the Coal and Iron 

32. See the discussion in Mowry (1946, pp. 225, 249, and 292-93); and Kolko (1963, 
Chap. 8). A few details of Kolko’s interpretation of the Perkins-J. P. Morgan links perhaps 
are mistaken, though there is no space here to discuss the question. 

33. For the “leapfrog” reference, see Downs (1957a, Chaps. 8 and 9); and Barry (1970, 
pp. 118 ff). 

34 . See the discussion of relief in section 4 and the references cited there. 

35. For the individual cases just mentioned, consult any detailed history of political 
parties and election campaigns, e.g., Polakoff (1981); for Carter in 1980, see Ferguson and 
Rogers (1980, pp. 28 ff). 

36 . Though not all analysts using an ethnocultural framework have claimed their results 
refute explanations of American politics that rely chiefly on economic arguments, many 
have. See, e.g., Bogue (1980), who cites Kleppner, Formisano, and Jensen to this effect. In 
fact, however, all but strong formulations of the “ethnocultural synthesis” are entirely 
compatible with this essay. And the strong formulations are clearly wrong. Almost none of 
the best-known studies in this tradition have employed adequate controls for economic 
factors, not have they tested analyses relying on sophisticated economic theories. Where 
sensible economic controls have been tried, the results show significant and powerful direct 
economic effects on voting behavior even in cases where ethnocultural theories should show 
to best advantage. See, for example, Lichtman’s (1980, Chap. 8) striking discussion of voting 

in the 1920s (whose analysis, especially when read in the light of his final chapter’s remarks 
on the utility for business elites of race and other noneconomic appeals, is highly compatible 
with this essay’s analysis) and Williamson’s (1981) study of Kansas in the 1890s. 

Ethnoculturally oriented voting analysts have also made life easy for themselves by 
avoiding any detailed analyses of class structure and the churches (as is briefly discussed 
later, in section 4). Nor does it help the cause of either theory or clarity when Morris 
Fiorina, in his analysis of Retrospective Voting in American National Elections (1981), 
adopts a definition of “economic” influence on voting that excludes cases in which workers 
who have lost their jobs in a world recession accept Jesus Christ as their savior and then 
come out vigorously in favor of, for example, aid to Taiwan, South Africa, or the B-l 
bomber (not to mention “right-to-work” laws). 

37 . See the discussion in Key (1959). 

38 . As Ferguson (1984, n.d.) suggests, often the best and most practical way to define 
“large” investors makes reference to (whoever controls) the largest corporations and banks 
in the country, and as many large individual fortunes as data can be gathered for. Also, as 
Ferguson (1986) observes, in this sort of work, as in other parts of the social sciences, 
missing data often represent a hazard which is to be worked around as best as one can. 

39 . It is obviously absurd to think that some fixed percentage of major investors 
somehow exercise an unvarying amount of influence at all moments in the life of a national 
economy. Any serious attempt to analyze concrete cases has to recognize that relations 
between large and small investors are dynamic and historically ever-changing. That said, it 
remains true that large investors are uniquely important to analyze within any given 
historical circumstance—even on the rare occasions in which many small investors become 
politically active and the level of class conflict rises. 

40 . It is obvious, for example, that many existing archives are missing any number of 
potentially important documents, including not only many which were inadvertently 
destroyed or mislaid but also many that were deliberately suppressed or which still exist but 
continue to be withheld by interested parties or their descendants. Material that has been 
recovered sometimes contains errors and can also mislead simply because it must sometimes 
be interpreted without a complete understanding of the context. More subtly, the kinds of 
material one examines most frequently can bias one’s conclusions. Excessive concentration 
on readily available government agency records, for example, makes it easy to exaggerate the 
importance of bureaucrats in historical events; the same is potentially true, mutatis 
mutandis, with all other kinds of records, including those in private business archives. 

Memoirs and eyewitness accounts of major historical events contain additional sources of 
bias as well. Most kings, presidents, ministers, and such are prone to exaggerate their own 
roles in key decisions. Such sources also contain all sorts of other confusions, good-faith 
mistakes, and occasionally outright fraud. 

It should also be obvious that no one has done more to damage the historical record than 
Alexander Graham Bell, and that written documents help little where the groups and persons 
concerned do not write at all or rarely articulate their views extensively. 

41 . Oral interviews, however, are probably the least useful and reliable of all possible 
sources. It is probably no accident, for example, that virtually all accounts of the business 
community that cast doubt on its general political skills and power rely extensively on oral 
interviews for their “facts.” For some striking comparisons of what high business and 
political figures told interviewers about their behavior in the New Deal and what archival 
evidence revealed about their actual behavior, see Ferguson (n.d.). 

42 . See the discussion of recent literature on appointments and the analysis of political 
power in Ferguson (1986). 

43 . For example, the analyses in Ferguson (n.d.). 

44. Note the restriction of this condition to major investors. While it probably fits most 

other investors to varying degrees at different points in time, this paper is not basically 
concerned with how to analyze mass politics. It is important to note, however, that a special 
interest in profit maximization does not derive from any unusual deductive powers unique to 
large investors. Their behavior, in this respect, faces constraints that may not operate evenly 
on the rest of the population. As is not the case for lesser investors, in many situations the 
resources available to major investors ensure that what they do matters, visibly, tangibly, 
and often immediately. An error, or inaction, accordingly, imposes real costs. 

45 . In this paper there is little point in taking a turn on the 
income/wealth/maximization/optimization/satisficing/time horizon/discount rate carousels. 
Nor is there time to do more than pause ritually to acknowledge that, of course, the role 
profits play in capitalist economies is unique and not at all comparable with other sources of 

Nor is there space to discuss how this analysis of wealthy investors relates to current 
discussions of cultural and ideological factors in social development. While these will have to 
wait for another occasion, it may be noted here—as it should be plain from parts of section 
4—that investments in “culture” and information represent a major share of all politically 
relevant investments by major investors. 

46 . For the notion of a nondecision, see Bachrach and Baratz (1970). All these cautionary 
remarks, of course, provide no excuse for endorsing vacuous searches for “perfect” or 
“comprehensive” indicators. One point in favor of careful working procedures in the social 
sciences is that they permit cumulative improvement. See also the remarks in Ferguson 
(1986) on so-called thick description as a social science strategy for advancing knowledge. 

47 . For the original, more complex models, and many more details and references to the 
literature on the System of ’96, see Ferguson (1984, n.d.). 

48. Which means that, unlike the first, this dimension is not continuous, but takes only 
two values. It also, of course, oversimplifies the relation of firms to the international 

49. It is perfectly sensible to plot the financial system on these graphs, as in Ferguson 
(1984). But financial markets are often highly decentralized and individual banks are 
frequently tied to very specific sectors and regional economies. Depending on the issues 
involved, accordingly, banks may simply support their borrowers. For example, it was surely 
not their own labor problems, but concern for labor problems that afflicted their investments 
(“borrowers”) that persuaded most nineteenth-century bankers to support government 
policy actions against labor. The assignment of the financial sectors to spaces on graphs like 
those discussed here is, therefore, more complicated than it appears at first sight. It is 
perhaps also worth noting that membership on boards of directors and trusteeships can 
often provide important evidence for further analysis by this scattergraph method. Note, 
however, that in such cases, the directorships merely function as data to support or negate a 
theory whose explanatory force depends upon the model of the underlying political 
economic relationships implicit in the dimensional analysis of the coalition. “Networks” by 
themselves explain nothing; their significance derives entirely from the demonstration they 
can provide that certain actors really are interacting in accordance with a theory of how they 
should act. I mention this point because previous (informal) statements of the methods 
discussed in this paper have been misunderstood as advocating “network analysis,” or as 
suggesting that the mere discovery of some sort of social tie between actors counts as definite 
evidence of joint, effective action. Obviously, it does not, and, a fortiori, it is substantive 
considerations of political economy, not the abstract fact of a “network,” that explains 
political outcomes. 

50. It should not, however, be too difficult to form an impression of what these will look 
like when published. The sketches of various party systems which follow all clearly label 
outcomes and principal actors, and discuss the broad dynamics of the various transitions. It 

is perhaps also worth noticing that nothing in this analysis prejudices the possibility that a 
normally stable party system could be briefly disrupted by some intensely but briefly 
contested issue unrelated to other elections within the period. In that case, graphs for one 
election would be scrambled, requiring an extra dimension useless for analyzing the system 
as a whole. But if the basic long-run industrial alignment is not disrupted, then the 
“exceptional” character of such an election will be evident. 

51 . See section 4. 

52 . Now a major theme of much work inspired by Immanuel Wallerstein’s research. 

53. See section 2. 

54 . Perhaps in reaction to the last generation of “consensus historians,” many recent 
studies of American history make a determined effort to discuss the often very painful daily- 
life experiences of ordinary people. This research has produced many significant works that 
amount to a powerful indictment of conventional pluralist theories of American politics. But 
while I am totally in sympathy with efforts to “assert the dignity of work,” “reveal the 
thoughts and actions of the rank and file,” or show ordinary people as “active, articulate 
participants in a historical process,” and similar aims, I am very skeptical about this 
literature’s frequent unwillingness and inability to come finally to a point. That ordinary 
people are historical subjects is a vital truth; that they are the primary shapers of the 
American past seems to me either a triviality or a highly dubious theory about the control of 
both political and economic investment in American history. 

55 . See, for example, Goldstein (1978, passim). 

56 . Except in specialist works like that of Goldstein (1978), such cases are normally 
neglected by all varieties of “consensus” historiography. 

57. See, e.g., Ratner (1967). Taxes, of course, always remain one side of a problem whose 
other face is expenditures, though this essay cannot afford more than the briefest 
consideration of either. 

58. “Ethnocultural” histories have produced much work on particular periods and 
elections, but no synoptic interpretations of American critical realignments. Perhaps the 
closest approach to one, though it scarcely represents a “pure” example of the genre, is 
Polakoff (1981). See also the works cited in Bogue (1980) and for a view that stands 
between these works and this paper, Shefter (1978). 

A few other reservations may also be noted here for the record. First, because this is a 
paper and not a book, the sketches which follow pass over any number of major events in 
American history, from the political adventures of John C. Calhoun to the Vietnam War. 
This is unfortunate, but there is no alternative. Second, similar limitations of space preclude 
much discussion of the role of “intellectuals” and ideas in the realignment movements 
discussed here. I hope to return to this theme in the separate studies of the party systems I 
expect to publish in the future. For the time being, it must suffice to note that virtually all 
the major business figures discussed here maintained close, often intimate, relations with 
channels for the dissemination of ideas. Third, while a few of the most obvious and 
outstanding facts that bear on the daily life of average Americans are discussed here as crude 
benchmarks, an enormous amount of demographic, statistical, and personal facts have had 
to be left out. Only the barest details of how women, minority groups, or even workers as a 
whole fared [as well discussed, for example, in Gordon, Edwards, and Reich (1982)] can be 
put into an essay that must concentrate on the process of bloc formation among major 
investors. Finally, this essay has to focus on broad trends at the national level, without 
regard to differences between levels of government. 

On many of these topics, however, an industrially sensitive analysis could contribute 
much. In regard to the progress of the movement for women’s rights, for example, it surely 
mattered a great deal that two of the biggest and fastest-growing sectors in the early stages 
of industrialization—textiles, and the brewing and liquor sectors—were dead set against 

women’s suffrage. One was opposed because initially women’s suffrage would likely have 
led to a stronger political position for its own workforce (which included many women and 
children); the other because of the leading roles women played in the Temperance campaign. 
Nor was it accidental that the final successful campaign for women’s voting rights coincided 
with World War I, when public hysteria and official investigations had virtually immobilized 
the heavily German-oriented brewers. 

The gradual passage of laws giving women the right to hold property in their own names 
in the nineteenth century also had major consequences once the trust movement appeared. 
Combined with the somewhat misnamed “managerial revolution” (which enabled 
shareholders to control large blocks of shares without having to actively manage the 
enterprises), this development led directly to the ironic fact that some women (e.g., Mrs. 
Russell Sage) ended up in command of enormous fortunes upon the deaths of their 
husbands. They could then redirect (some of) the money to social causes. But more of this 
another time. 

59 . For example, the discussion in Formisano (1981); Ferguson (1986) discusses some of 
the ramifications of taking positions on this question. 

60 . Elbridge Gerry and his allies, for example, were certainly not poor, provincial 

61 . In this and most of the remaining notes in this paper, it would be easily possible to 
reel off a plethora of references. But there is simply not enough space for this. Accordingly, 
subsequent references are strictly limited to the minimum number necessary to support the 
argument and make no attempt to index even a minimally adequate list of major works on 
each period. 

62 . See the excellent summary of Hamilton and other Federalist leaders’ wealth and 
kinship ties in Burch (1981a, Chap. 2); this source also has a brief summary of Hamilton’s 
fiscal program. 

63 . See the discussion of banking practices in regard to loanable assets in Hammond 
(1957, pp. 74-75). 

64 . Among many discussions see, e.g., Polakoff (1981, Chap. 2), La Feber (1972), and 
Van Alstyne (1972). 

65 . Burch (1981a, p. 88) is most illuminating. Dallas himself represented Stephen Girard 
on several occasions. His very close associate Jared Ingersoll regularly represented Girard. 
Dallas seems also to have served as a sort of courier between Philadelphia’s Republican 
business community and the administration. 

66 . Reliable trade figures showing the dramatic reorientation of American trade after the 
Revolution away from Britain have only recently become available. See Robertson and 
Walton (1979, pp. 126-28). For John Jacob Astor and the other Republican merchants, see 
Burch (1981a, p. 88). 

67 . Hammond (1957, pp. 145-461); Van Alstyne (1972); and Burch (1981a, Chap. 3). 
Note that Joseph Story did not support Jefferson’s embargo policies. For the Western 
movement, see Van Alstyne (1972); for background, La Leber (1972). Paying for the 
weaponry necessary for this imperial venture, however, was a contentious issue in both 
Jefferson’s and Madison’s regimes. 

68 . A word about the significance of this brief increase in turnout may be advisable here. 
There is no reason in principle why the dream of conquering the West, or Canada, or 
Llorida, should not also have captured a large mass of voters, as well as the elites this paper 
dwells on. Indeed, it almost certainly did. But the very steep decline in turnout in the 
elections following, as well as the considerations advanced below, in the discussion of the 
Jacksonian era, make it difficult to claim that voters were determining policy in general. On 
the contrary, the rise in turnout probably testifies to massive mobilization by sharply divided 

69 . Hammond (1957, pp. 146-47); for Story, see Burch (1981a, p. 110). In this paper it 
is not possible to pursue the question of how the Supreme Court relates to the various party 
systems discussed here. Burch’s discussion of Supreme Court appointments (1980, 1981a, b) 
suggests, however, a variety of ways this issue can be approached that have so far not been 
widely explored, even in the growing literature on so-called critical legal studies. 

70 . Hammond (1957, Chaps. 6 and 8) is a superb discussion. For Girard’s plans, see 
Brown (1942). 

71 . Brown (1942) and Hammond (1957, Chap. 9) have excellent discussions. See also 
Burch (1981a, pp. 99-100). 

72 . The origin of Southern support for tariffs in this period has been debated extensively. 
For references and a perhaps less than wholly convincing analysis, see Preyer (1959). 

73 . For a vivid account of the distress that accompanied the depression of 1819, see 
Rezeck (1933). The 20 percent unemployment figure (in some cities) is a guess. It assumes 
that the figures for particular locations mentioned in Rezeck (1933, pp. 29-31) are 
exaggerations and that the panic of 1819 probably was not as severe as later depressions, 
such as those in the 1890s or 1930s. 

74 . See Burch (1981a, p. 100 and p. 122, n. 69). Astor evidently did not seek repayment 
of principal until after Monroe left the White House. 

75 . Shade (1981), which is an exceptionally interesting essay; McCormick (1960); and 
Polakoff (1981, Chap. 4). Note that local rivalries in this period remained intense. For some 
of the tensions associated with this development, see Welter (1960). 

76 . Taussig (1964), and Pincus (1977) are sources on the early tariffs. See also a fine and 
very stimulating study by Chase-Dunn (1980), which, however, attaches more importance to 
manufacturing during the period before 1860 than its weight in the economy warranted and 
greatly underestimates the significance of railroads. 

77 . Hammond (1957); compare the reception accorded this book with the earlier study of 
Schlesinger (1945) which Hammond had brilliantly reviewed (Hammond, 1946). Hammond, 
perhaps, could have made a bit more than he did of the support the Bank commanded 
among some large state banks (including some in New York City), though he was aware of 
it and indeed briefly discusses it most intelligently. 

78. See Burch (1981a, p. 171, n. 126) and Sobel (1977, pp. 8 ff. and 26). For 
Philadelphia’s crucial role in finance during this period, see Chandler (1954). 

79 . Hammond (1957, Chaps. 12-14); but see especially Burch (1981a, p. 147), which 
demonstrates major errors of fact in earlier criticisms of Hammond by Remini (1967) and 
especially by F. O. Gattell (1966). 

80 . See the discussion in Haeger (1981, pp. 138 and especially 139), which is a nice case 
study of what American “radicalism” is frequently all about. Hammond made the same 
point in general but not in detail. On New York parties in general, see Bridges (1982). 

81 . See the discussion in Trimble (1919, pp. 410-11); for Cambreleng’s business ties, see 
Burch (1981a, p. 152, p. 170, n. 119 and 123, and p. 171, n. 126). 

82. Compare the indications of increasing party cohesion in, e.g., Russel (1972). On the 
basis of a wealth of data, Shade (1981) argues convincingly that national parties properly 
“emerged” only toward the end of the 1830s. This is also the present essay’s argument; but I 
am somewhat puzzled why Shade believes this development is difficult to explain, or how 
relabeling capitalist development as “social mobilization” advances the inquiry. 

Nevertheless, his broad argument is compelling and merits a wide readership. 

83 . Evans, 1981, p. 34. 

84 . A good survey of the American experience with laws regulating wage and hours is 
Ratner (1980). See also Dankert, Mann, and Northrup (1965). David and Solar (1977) 
summarize trends in real wages and the cost of living. Williamson and Lindert (1980) 
provide a comprehensive analysis of wealth and income differentials over the course of 

American history. The minuscule nature of relief (less than 1 percent of GNP) all through the 
nineteenth century is clear in Peterson (1935) and can be directly estimated from what are 
probably reliable data for the 1890s in Mills (1894). Note that Peterson suggests that relief 
was much better organized in the 1890s than previously. It is also probably worth noting 
that relief expenditures ran highest in the largest American cities. 

85 . The illiteracy figures are taken from Cremin (1980, pp. 490-91), who cautions that 
variations in census procedures affected results at different points and that blacks’ illiteracy 
rates ran far higher than whites’. The 1854 Census estimates of newspapers show 852 papers 
in the United States in 1828, 1,631 in 1840, and 2,526 in 1850. The estimate of prolabor 
papers comes from Sumner (1936, p. 286) and is for the years 1828-1832—years before the 
panic of 1837, which wrecked unions across the country. 

86. I have not been able to find any reliable estimates of the economic value of the output 
of political machines in this period. For slightly later dates, Yearly (1970, passim, but 
especially pp. 265-66) is suggestive. Much of the literature on political machines in America 
is highly romantic. A more accurate and less sentimental treatment seems now to be 
emerging, however; see, for example, Shefter (1976) or Erie (1980). 

Note that a few voting analysts have raised questions about the reliability of the figures 
for voting turnout in this and later periods. In particular, it is sometimes suggested, the U.S. 
Census population reports might induce important errors. This chapter does not have space 
for a full consideration of such arguments, but it should be pointed out that Burnham, who 
is the most frequently cited source of turnout figures, made important use of state rather 
than federal censuses whenever he believed the federal government’s figures could be 
improved upon. Accordingly, calculations of errors based on experience with the U.S. 

Census miss the point; and the Burnham estimates, which were very carefully done, are 
probably as good as any that will ever be produced. 

87 . See, e.g., the discussion in Cremin (1980, pp. 338 and 341 ff.); this source perhaps 
exaggerates the number of actively involved farmers who did more than read papers or 

88 . The literature is immense, but see, for example, Beard and Beard (1934, Chaps. 15 
and 17). 

89 . See the review of these various studies in Lee and Passell (1979, Chap. 10). 

90 . For references and a discussion of these theories, see Lee and Passell (1979, pp. 214- 

91 . For example, Robert Toombs, in a speech to the Senate, in the Congressional Globe 
(Jan. 7, 1861), pp. 270-71; though this is quoted in Lebergott (1972, p. 214), its point seems 
not to have been taken up in the subsequent literature, although Lebergott himself makes it 

92. See the discussion in Polakoff (1981, p. 165), although he perhaps underestimates the 
pro-Southern sentiment that grew in parts of southern California. Note also that further 
settlement was certain to follow a successful transcontinental railroad, which many 
Southerners promoted. 

93 . Jones (1970) is one of many discussions. 

94 . For Walker, see LaFeber (1993, pp. 28-30); for Cuba, see, e.g., Jones (1970, pp. 66, 

95 . Expansion into Mexico, for example, virtually required that the states remain united. 
Not surprisingly, therefore, many early Southern supporters of territorial expansion, such as 
South Carolina’s Joel Poinsett, opposed efforts to bring North-South conflicts to a head. See 
also Draughton (1966) on the role played by Sam Houston’s brother George in sparking 
opposition to Calhoun in the late 1840s. 

96. Note also that parts of several of these states fell well below the Mason-Dixon line, 
the traditional dividing point between North and South. 

97 . See, among many sources, Russel (1948, passim). Jefferson Davis, future president of 
the Confederate States of America, was a major player in some of these struggles. 

98 . See Sorin (1970) for a statistical study of leading New York abolitionists. A leading 
abolitionist, New York’s Gerit Smith, was for some years probably the largest landowner in 
the United States. Lewis Tappan, another abolitionist leader, founded the firm that is today 
Dun & Bradstreet. 

99 . “James F. Joy,” National Cyclopedia , XVIII, p. 121; Forbes (1900, p. 171). 

100 . “James F. Joy,” National Cyclopedia, XVIII, p. 121; Dodd (1911, p. 787); Stover, 
(1975, p. 90). 

101 . Edelstein (1968, pp. 216-17). Forbes had earlier helped ship guns to Kansas. Gerit 
Smith also contributed to Brown. See “Gerit Smith,” National Cyclopedia, XVIII, p. 332. 

102 . See, e.g., Forbes (1900, p. 186). 

103 . Dodd (1911, p. 787) identifies several prominent New York Democrats as 
controlling the Illinois Central in this period. But while Dodd may be correct, neither the 
United States Railroad Directory for 1856 nor Low’s Railway Directory for 1858 records 
any of the men Dodd discusses as serving on the board. These directories do, however, show 
clearly that Dodd was right in claiming that New York interests maintained a dominant 
position on the board. The next directory I have been able to locate dates from 1861. This 
shows a continued heavy representation of New Yorkers, but also some turnover, including 
the removal of one director listed as living in Chicago, and the arrival of Nathaniel Banks. 
The seriously incomplete accounts of Lincoln’s relationship to the Illinois Central in 
Sunderland, (1955, pp. 24 and 39) and Corliss (1950, pp. 108, 117 ff., and 121) are 
consistent with the view that the Central’s top officers and directors were far more favorably 
inclined to Lincoln in 1860 than in 1858. It should also be observed that railroads in certain 
areas (like the Baltimore & Ohio, which ran through border states) were not at all 
enthusiastic about either Lincoln or conflict with the South. 

104 . Forbes (1900, p. 182); “James F. Joy,” National Cyclopedia, XVIII, p. 121. 

105 . While the full network of ties between all the principals in the Lincoln campaign is 
too dense to discuss here, for Ogden’s business relations with Thomas Scott of the 
Pennsylvania Railroad, see Burgess’ Railway Directory (1861), p. 88. Note also that most of 
these men still hoped to avoid war with the South. 

106 . For Cornell, see Dorf (1952, pp. 199 and 227); for Chase and Cooke, see Burch 
(1981b, pp. 20-21). 

107 . Almost all accounts of Lincoln’s election mention Pennsylvania and the tariff; for 
banking reform, see Rezeck (1942) or Hammond (1957, Chaps. 21 and 22). See also Burch 
(1981b, p. 22). 

108 . The literature on these matters is immense; see, e.g., Polakoff (1981, pp. 196 ff.) for 
a brief account. 

109 . Of many accounts, see e.g., the discussion of McClellan’s candidacy in Burch 
(1981b, p. 55, n. 70). In this period many railroads also shifted back and forth among the 
parties in a complex pattern that defies summary here. 

110 . Polakoff (1981, Chaps. 6 and 7); Burch (1981b, pp. 74-75). 

111 . For the railroad and other bargains in the Compromise of 1877, see Burch (1981b, 
p. 74). See also Josephson (1963) for many of the events of this period and Goodwyn (1976) 
or Schwartz (1976) for the subsequent nightmares Southern elites visited upon their subject 

112 . Schirmer (1972, Chap. 2). For civil service reform in this period see especially Roy 
(1981); for Forbes, see “John Murray Forbes,” National Cyclopedia, XXXV, pp. 331-32. 

113 . For the New York Central and the Democrats, see inter alia, Shefter (1976); for the 
turnout efforts in this period, see Polakoff (1981, pp. 232-33). In the 1880s the New York 
Central drew closer to the GOP. 

114 . 1 am presently preparing a study of “The System of ’96: A Reconsideration,” which 
attempts a rough quantitative evaluation of these trends. 

115 . See the sensitive discussion in Polakoff (1981, pp. 249 ff.); note his discussion of the 
importance of distinguishing among levels of government. 

116 . Goodwyn (1976) presents a wealth of new and very important information on the 
origins of Populism and the dynamics of its ascent. Schwartz (1976) adds important 
information on the Populist press, which Goodwyn also discusses, and has a penetrating 
discussion of some of the larger background reasons for the Populists’ eventual demise and 
the emergence of a racist planter-industrialist coalition in the South. 

117 . For example, Burnham (1970, 1974, 1981). 

U_8. See Ferguson (n.d.). 

119. Montgomery (1979) and Brecher (1972); the best strike statistics are those presented 
in Griffin (1939). 

120 . Where everyone admits that blacks and poor whites were deliberately pushed out of 
the electorate; I regret that space limitations preclude my discussing these developments in 
any more detail. Note, however, that Northern elites were very deliberate parties to this 
scheme. Northern bar associations and law reviews, for example, worked overtime thinking 
up reasons why the courts should not hear suits brought by disenfranchised Southern blacks. 

121 . Turnout dropoff is figured by averaging each states’ turnout in 1888, 1892, 1896, 
and 1900, then subtracting from this figure the average of the turnouts in 1920 and 1924. 
The turnout data came from Walter Dean Burnham and incorporate a minor correction for 
Delaware that he has not yet published. The figures for manufacturing value added per 
capita come from Kuznets, Miller, and Easterlin (1960, p. 131). For each state I have 
subtracted value added per capita in 1889 from the same category for 1929, yielding the 
difference per capita that appears in the graph on the X axis. The three exceptional states 
(which are not included in the calculations for the regression line drawn on the scattergraph) 
are Maryland, Rhode Island, and Wyoming. (Arizona and several other states not then in the 
Union also had to be eliminated since they provided no totals for 1888-1896 to compute.) 

In all three cases, the special circumstances that produced the original low turnouts are 
too obvious to require elaborate analysis. Maryland was simply the northernmost state to 
have adopted the Southern system of voter disenfranchisement (around 1907). (It should be 
recalled that if the Battle of Antietam had gone the other way, Maryland would probably 
have made the transition much earlier.) Rhode Island in the nineteenth century was less a 
political jurisdiction than the name of America’s largest company town, as the elites of this 
early industrializing textile center, lacking any rural smallholders to strike alliances with, 
installed a succession of fantastically restrictive suffrage laws that at times excluded as much 
as 75 percent of the white male population of voting age from participation. (They also had 
to put down a series of revolts against their new order, of which Dorr’s Rebellion, in 1842, 
is perhaps the best known.) And Wyoming, for much of the System of ’96 the least 
populated state in the Union, probably eluded mass disenfranchisement for the same reason 
that Andorra escaped occupation by the Nazis during World War II—some places with more 
sheep than people are not worth the trouble of taking them over. 

The full statistics for the regression equation are as follows. The equation itself is Y = 

8.104 + ,057x, R 2 = 0.45. 

The standard errors for the first and second terms, respectively, are (2.426) and (0.0118); 
t-values are (3.34) and (4.81); F( 1/28) = 23.231. These are all significant results, and tests 
did not suggest significant heteroscedasticity. 

All regressions of this sort face various pitfalls. Spatial autocorrelation, for example, is a 
possibility. But with the limited number of cases there is little point in testing. Since the 
Southern states are not in the equation at all, the most obvious source of spatial 
autocorrelation is not a problem; nor does there appear to be a problem with the other 

states. Omitted variables, of course, are another possibility, but any discussion of particular 
candidates would be very lengthy; I believe there are good reasons for cautiously accepting 
the equation as is. 

122 . See Ferguson (n.d.) for more details. 

123 . Note that there is no reason to assume that changes in election laws by themselves 
necessarily produced the total turnout decline. All the factors mentioned in this paragraph 
doubtless played a role. At some point, also, “negative bandwagons” would doubtless form, 
pushing turnout much lower as voters realized that such incidents as the wholesale fraud 
that defeated Henry George in the New York mayoralty race of 1887 meant that they would 
never be permitted to assume power. 

124 . For the basic statistics and an excellent discussion of the merger wave, see Edwards 
(1979, Chap. 3) and Reid (1976, pp. 66-68). 

125. See the discussion in my “System of ’96.” 

126 . Goodwyn (1976, Chap. 13); for Hearst’s copper (and, thus silver) interests, see 
Lundberg (1937, p. 65). 

127. See the longer discussion in my 1984 and n.d. papers. Note that rivalries with 
European companies sometimes complicated the partisan choices of the copper companies in 
ways too complex to discuss here. 

128 . Ibid.; Weinstein (1968); and Kolko (1963). For reasons of space no further 
discussion of the Progressive era is possible here. 

129 . See Kolko (1963); but especially Ferguson (n.d.). 

130 . Oil imports, where they became an issue, of course ended demands for totally “free” 
trade by independent oilmen. 

An outstanding review of the relations between big business and the press in this period is 
Debouzy (1972), pp. 153-56; see also pp. 210-22 on the relations of business to the 
churches and universities. Analyses of mass politics that slide past the facts discussed so well 
in this French study are unlikely to produce anything except confusion in regard to such 
topics as “rational expectations.” 

131 . Ferguson (1984, n.d.) and Ferguson and Rogers (1981). As originally published, the 
next few paragraphs of this chapter borrowed liberally from the brief summary in Ferguson 
(1984); the 1984 essay was also indicated as the appropriate source for details and 
references. In this book, a revised version of the 1984 essay follows immediately. Removing 
the paragraphs, however, seemed likely to significantly impair the unity and pedagogical 
value of the overview of American history presented here. I therefore left them in. 

132 . Virtually all the discussion which follows is based on Ferguson (1984, n.d.), so more 
specific references will be kept to a minimum. Both of these papers present a formal model 
of the processes discussed here along the lines discussed in section 3. 

133 . The quotation comes from an entry in Raymond Moley’s Journal for June 13, 1936, 
now in the Moley Papers, Hoover Institution. Astor and Harriman were major owners of the 

134 . To such an extent that when a bank with ties to top union officials failed in the 
Depression, Standard Oil of New Jersey and other large companies raised a fund for its 
recapitalization. See Ferguson (n.d.) for details. 

135. Ferguson and Rogers (1980, pp. 267-75; 1981, pp. 20-26). 

136 . Ibid. 

137 . See, e.g., Goulden (1971, pp. 257 ff.) for a striking example. 

138 . See the discussion in Ferguson and Rogers (1981, pp. 13 ff.). 

139 . Kalt (1981) presents convincing estimates of the size of these transfers. 

140 . This subject merits more discussion than it can be given here. I hope in the near 
future to consider it at greater length and with extensive documentation. 

Note that the aggressive fundamentalism displayed by many elite Texas churches in the 

1970s has a powerful “elective affinity” for decontrol because of its emphasis on individual 

141 . No single institutional change can possibly undo the effects of a whole system of 
influences. Still, consider the likely consequences of a federal campaign spending reform that 
established individual tax credits for contributions to political campaigns instead of 
guaranteeing money to the nominees of the two major parties. If these contributions were 
allowed up to, say, $100, then masses of ordinary voters would have resources that really 
counted. Some quite striking developments in the American party system would probably 
occur as these pools of money found their way to new candidates and parties, and as 
venturesome candidates discovered that even nonvoters now had resources worth pursuing. 

Chapter Two 

1. See, among many other comments on Fisher’s unfortunate pronouncement, John 
Kenneth Galbraith, The Great Crash (Boston: Houghton Mifflin, 1961), p. 75. The Irving 
Fisher Papers at Sterling Library, Yale University, contain many references to his service on 
boards of investment companies and Remington Rand, a major manufacturer. Fisher’s later 
role in New Deal monetary controversies made these ties an object of extensive comment. 
The final copy and various drafts of Lamont’s letter to Herbert Hoover of October 19, 1929 
are in the Lamont Papers, Baker Library, Harvard University. (Most archives used in this 
project are adequately indexed; box numbers are provided for the readers’ convenience only 
where confusion seems likely.) 

2. For a review of debates on the stock market’s contribution to the Depression, see Peter 
Temin, Did Monetary Forces Cause the Great Depression ? (New York: W. W. Norton, 

3. For a good summary of the Depression’s effects on the economy, see Lester Chandler, 
America’s Greatest Depression (New York: Harper, 1970). 

4. Ibid. For the Depression in comparative context, see Charles Kindleberger, The World 
in Depression (London: Allen Lane, 1973). 

5. The 1933 Banking Act, also commonly referred to as the Glass-Steagall Act, should not 
be confused with a 1932 bill that bore the names of the same senator and representative but 
dealt with different financial issues. The Emergency Banking Legislation, rammed through 
Congress in a matter of days in March 1933, was also a different bill. 

6. The first of several New Deal reciprocal trade measures passed rather early in 
Roosevelt’s first term, but, as explained in this chapter, it had virtually no immediate effect 
on the administration’s essentially protectionist trade policy. 

7. The role of Keynesian public finance versus a bulging export surplus in leading the 
Swedish revival of the mid- and latter-1930s has been extensively debated; the weight of the 
evidence suggests that the Swedish government did not vigorously implement the advanced 
monetary and fiscal proposals that were undeniably in the air. In view of this paragraph’s 
clear distinctions and exact datings of the New Deal’s “Keynesian turn,” I find inexplicable 
the recent claim by M. Weir and T. Skocpol that my essay “mistakenly conflates the labor 
regulation and social insurance reforms of 1935-36 with Keynesianism.” See their “State 
Structures and the Possibilities for ‘Keynesian’ Responses to the Great Depression in Sweden, 
Britain, and the United States,” in P. Evans, D. Rueschemeyer, and T. Skocpol, eds., 

Bringing the State Back In (New York: Cambridge University Press, 1985), p. 154. 

8. See, for example, Arthur Schlesinger Jr., The Age of Roosevelt, 3 vols. (Boston: 
Houghton Mifflin, 1957-60); William Leuchtenburg, Franklin D. Roosevelt and the New 
Deal (New York: Harper, 1963); and Frank Freidel, Franklin D. Roosevelt, 4 vols. (Boston: 
Little, Brown, 1952-). Erwin Hargrove observes how images of Roosevelt and the presidency 
derived from such works have dominated postwar political science, in his The Power of the 

Modern Presidency (New York: Knopf, 1974), Chap. 1. 

9. See, for example. Barton Bernstein, “The New Deal: The Conservative Achievements 
of Liberal Reform,” in Bernstein, ed., Toward a New Past: Dissenting Essays in American 
History (New York: Pantheon, 1968), and Ronald Radosh, “The Myth of the New Deal,” in 
Radosh and Murray N. Rothbard, eds., A New History of Leviathan (New York: Dutton, 
1972), pp. 146-86. 

10 . See, for example, Ellis Hawley’s “The Discovery and Study of a Corporate 
Liberalism,” Business History Revieiv 52, 3 (1978), pp. 309-20. In contrast, his classic The 
New Deal aitd the Problem of Monopoly (Princeton: Princeton University Press, 1962) does 
not emphasize these themes. See also Alfred Chandler and Louis Galambos, “The 
Development of Large Scale Economic Organizations in Modern America,” in E. J. Perkins, 
ed., Men and Organizations (New York: Putnam, 1977). It appears that Weir and Skocpol’s 
“Keynesian Responses,” and other recent essays in the “state managers” vein, represent 
something of a synthesis of this view and the older “pluralist” approach—with the 
conspicuous difference that the state manager theorists rely mostly on secondary sources. 

11 . For a review of the German work, see H. A. Winkler, ed., Die Grosse Krise in 
America (Gottingen: Vandenhoech & Ruprecht, 1973); perhaps the finest of the libertarian 
writings are those by Murray Rothbard—see his “War Collectivism in World War I,” and 
“Herbert Hoover and the Myth of Laissez-Faire,” both in Radosh and Rothbard, eds., New 
History of Leviathan-, for Kolko’s views, see his Main Currents in Modern American History 
(New York: Harper & Row, 1976). 

12 . Some commentators, such as Elliot Rosen in his very stimulating Hoover, Roosevelt 
and the Brains Trust (New York: Columbia University Press, 1977, hereafter Brains Trust), 
have questioned the existence of “two New Deals.” These doubts, however, are difficult to 
sustain if one systematically compares the policies pursued during each period. 

13 . Sidney Verba and Kay Schlozman’s recent suggestion that American workers 
remained captivated by the “American dream” all through the New Deal does not constitute 
an answer. The “American dream,” before the 1930s, had not included mass unionization or 
social security—the term is elastic. See their “Unemployment, Class Consciousness, and 
Radical Politics: What Didn’t Happen in the Thirties,” Journal of Politics 39, 2 (1977), pp. 

14 . See the discussion in Milton Friedman and Anna Schwartz, A Monetary History of 
the United States (Princeton: Princeton University Press, 1963); Temin, Monetary Porces; 
Karl Brunner and Alan Meltzer, “What Did We Learn from the Monetary Experience of the 
United States in the Great Depression,” Canadian Journal of Economics 1, 2 (1968), pp. 
334-48; Elmus Wicker, “Federal Reserve Monetary Policy, 1922-33—A Reinterpretation,” 
Journal of Political Economy 53 (August 1965), pp. 325-43, and later writings. 

15. Kurth, “The Political Consequences of the Product Cycle: Industrial History and 
Political Outcomes,” International Organization 33 (winter 1979), pp. 1-34; Gourevitch, 
“International Trade, Domestic Coalitions and Liberty: Comparative Responses to the Crisis 
of 1873-96,” Journal of Interdisciplinary History 8, 2 (1977), pp. 281-313; Hibbs, 

“Political Parties and Macroeconomic Policy,” American Political Science Review 71, 4 
(1977), pp. 1467-87. 

16. 1 build here on my “Elites and Elections; Or What Have They Done to You Lately? 
Toward an Investment Theory of Political Parties and Critical Realignment,” in Benjamin 
Ginsberg and Alan Stone (eds.), Do Elections Matter ? (1st ed.; Armonk, N.Y.: Sharpe, 

1986); and “Party Realignment and American Industrial Structure: The Investment Theory 
of Political Parties in Historical Perspective,” in chapter 1 of this volume. 

17 . Hibbs, “Political Parties,” p. 1470. 

18 . For representative cross-national data on some of the large differences see ibid., and 
Edward Tufte, Political Control of the Economy (Princeton: Princeton University Press, 

1978), chap. 4. 

19 . See, for example, Kurth, “Political Consequences”; Gourevitch, “International 
Trade”; and David Abraham’s The Collapse of the Weimar Republic (2nd ed.; New York: 
Holmes & Meier, 1986); Abraham’s “Introduction to the Second Edition” should be 
consulted on the long controversy. The honored ancestors of this general approach include 
Alexander Gerschenkron, Bread and Democracy in Germany (Berkeley: University of 
California Press, 1943); Eckhart Kehr, Battleship Building and Party Politics (Chicago: 
University of Chicago Press, 1975); and Arthur Rosenberg, Democracy and Socialism (New 
York: Knopf, 1939). 

20 . Taxes, for example, might be one issue that would not disappear entirely. 

21 . Indeed, many exceptions exist; for example, firms whose hazardous working 
conditions are more likely to be detected by a union (which can bear the detection costs) 
than by unorganized individuals (who may never realize the danger) will resist unionization 
far more fiercely than one might expect from the role wages play in their value added. 

Ability to pass through wage increases and, consequently, a firm’s location in the flow of 
production will also affect concessions vs. opposition to labor. Nevertheless, as a first 
testable approximation, the rule is probably the best available. 

22. The (rounded) data for all but chemicals and copper come from the 1929 Census of 
Manufacturers as presented in Charles A. Bliss, The Structure of Manufacturing Production 
(New York: National Bureau of Economic Research, 1939), appendices, especially p. 214. 
My “automobiles” category is a weighted average of two of Bliss’s categories (parts and 
assembly). The chemicals figure has been calculated as per note 39, below. The copper data, 
for 1929, have been calculated from the 1963 Census of Mineral Industries (Washington, 
D.C.), vol. 1, 10C-10, table 1 (the figure is for “copper ores”). The “refining and smelting” 
part of the industry shows up in the 1929 Census of Manufacturers (Washington, D.C.), vol. 
2, p. 1085. The most reasonable method of weighting and combining all the data yields a 
corrected estimate of 36.2 percent; but the difference in terms of this article are meaningless. 
Note that all figures are for industries; data for individual firms are not available, causing 
problems for estimates of individual firms (see note 39, below). Note also that the estimates 
for petroleum probably greatly understate the industry’s capital intensity. Finally, industries 
are listed on the chart if at least one firm in the top 20 as listed in table 2.1 did substantial 
business in them in both 1929 and 1935.1 have also added textiles, by far the largest 
industry in terms of employment during most of this period, and shoes, as a representative 
“old” industry also with substantial employment. 

23 . The assumption that vectors of class conflict indicators and public policies can be 
treated as scalers is not strictly necessary to this analysis. But it is in accord with both 
ordinary language and many social science treatments of “rising” or “falling” social strife 
and labor activity. Note also that while, as suggested in this chapter, this analysis scarcely 
adds up to a theory of the labor movement and while this essay focuses on the business 
community, labor is not being treated as a passive element—note carefully the horizontal 
axis on figure 2.1, which reflects changing levels of social class conflict. 

24. I choose this language carefully, to cover instances where a business firm supports 
both parties. Such instances are much less common or important than generally believed. As 
I argue at greater length in my “Party Realignment,” chapter 1 . no more in politics than in 
the stock market can everyone profit by buying into the same stock. No less important, most 
cases of apparent “bipartisanship” rest on undiscriminating evidence—usually public 
campaign expenditure records. In most cases, more institutionally subtle behavior signals a 
preference for one or the other candidate. 

25 . For this, obviously, archival evidence has a privileged position. See, however, my 
“Party Realignment” chapter 1, for a discussion of the whole question of “evidence.” My 
experience with corporate records convinces me that the single most important form of 

business influence on American politics is not the actual transfer of money but the power 
major businessmen have to influence associates and cultural institutions, especially the 

26 . As with all modeling in the social sciences, of course, more dimensions become 
necessary the finer the context. “Broadly” labor-related issues include most “social welfare” 

27 . On these definitions, note 1) the “free” market may well be an oligopoly maintained 
by a few firms; 2) “internationalists” often have to live in a world full of nationalists and 
accordingly modify their behavior; 3) occasionally “nationalism” and “protectionism” are 
not equivalents; 4) occasionally “internationalism” could helpfully be broken down into 
several dimensions; 5) “internationalism” is usually a matter of degree—any number of firms 
oriented toward international competition in an open world economy have been happy to 
welcome government aid where that would not upset a larger equilibrium. 

To use this dimension for a real economy requires some impression of the positions of the 
various industries and firms. I use an independent source: with one exception noted in this 
essay, subsequent scattergraphs rely largely on summaries of the changing world economic 
positions of major American businesses presented by Mira Wilkins in her The Maturing of 
Multinational Enterprise (Cambridge: Harvard University Press, 1974). Based on a judgment 
about which policies objectively advanced the interests of firms as Wilkins depicts them 
(where “interest” is equated with profitability), I have placed firms and industries into one of 
five arbitrarily defined, ordinally ranked spaces along the nationalist-internationalist 
dimension. Some argument about particular cases is to be expected, especially with General 
Motors in the ’20s, where most analysts have underestimated the pressures from GM’s 
major owner, DuPont, to limit its overseas commitments and the importance of the so-called 
“rubber war.” However, nothing of importance here is sensitive to this imprecision; indeed, 
the ordinal scale is of some advantage. On the copper industry I follow James Ridgeway, 

Who Owns the Earth ? (New York: Macmillan, 1980), p. 106. 

28 . Because only one of these axes has a true metric the definition of a “quadrant” is 
arbitrary: what is at issue is proximity in the defined spaces. Here, however, it is convenient 
to speak of “quadrants.” 

29. See the discussion in my “Party Realignment,” which also contains a longer and more 
general statement of the “scattergraph” approach to the analysis of American party systems 
applied in the present article, a detailed justification for concentrating on big business in the 
analysis of political change, and some qualifications—unimportant in this article but of 
considerable significance in general—on the treatment of the financial sector in such graphs. 

A word should probably be added about how agriculture figures into the analysis 
presented here. While reasons of space make it impossible to justify the claim, the politics of 
farm policy in the New Deal has received more attention than it deserves; while agriculture 
constituted an important part of Roosevelt’s coalition, most of what defined the New Deal 
derived from other constituencies. Furthermore, agriculture, like industry, is marked by both 
class and sectoral conflicts, and its political behavior can be analyzed on lines analogous to 
those for industry. 

30 . Complicating issues do not, of course, only appear during transition to a new party 
system, I simply claim that additional issues sometimes complicate such transitions. 

31 . See the discussion in my “Elites and Elections.” Severe but brief downturns, like that 
in 1920-21, do not last long enough to generate the processes described below in other than 
feeble, symptomatic form. 

32. Because of this “cumulative” role played by past financial and other secondary 
cleavages, the actual sequence of historical events makes a real difference even in the model. 

33. This expression refers to a party system before decay. See, for example, Paul 
Kleppner, “Critical Realignments and Electoral Systems,” in Kleppner et ah, The Evolution 

of American Electoral Systems (Westport, Conn.: Greenwood Press, 1981), pp. 1-33. 

34 . See my “Party Realignment,” section 4. The shoe industry was singular because in 
contrast to most other charter members of the Republican bloc, its firms directly confronted 
a giant trust, United Shoe Machinery. As a consequence, they were far more likely to harbor 
doubts about the wisdom of “big business” and often went over to conservative Democrats. 

35 . This discussion neglects a modest movement for very limited trade liberalization 
promoted by several sectors in the pre-1914 period. 

36 . For the merger movement of the 1890s, see my discussion in “Party Realignment.” 
Railroad mergers, organized by leading financiers, were also a part of the consolidation of 
this bloc. 

37 . For World War I’s major financial consequences for the U.S. economy, see Charles 
Kindleberger, “United States Foreign Economic Policy 1776-1976,” Foreign Affairs , January 
1977, pp. 395-417. 

38. For the period’s labor turmoil, see Jeremy Brecher, Strike! (Boston: South End Press, 
1977), chap. 4. 

39. For rankings along the “internationalism” dimension see above, note 27. Because 
data for wages as a percentage of value added are available only for industries as a whole, I 
have assigned specific large firms the value of the industry mean, thus eliminating intra¬ 
industry differences. While these may sometimes be significant, they are miniscule by 
comparison to the variations across industries. I have assigned the firms to particular three- 
digit industries by comparing their main lines of business with “Manufacturing Industries 
with Large Scale Operations, 1929,” (Bliss, Manufacturing Production, p. 214); and, where 
possible, checking my industry code assignments against those in the Harvard Business 
School Project data presented in the Chandler papers “Global Enterprise” and “The M 
Form.” In this period only the calculations for General Electric, which moved in the 1920s 
into consumer durables while continuing its older lines of business in electrical machinery, 
raised questions about the need to weight two very different Standard Industrial 
Classification three-digit codes to get one number for the whole. Because the size of the 
consumer durables segment of GE’s business (with its relatively low wages as a percentage of 
value added) seemed too small to affect the overall firm average, I did not refine the data for 
“electrical machinery.” However, Westinghouse, which had not yet moved into consumer 
durables in this period, always seems to lag slightly behind GE’s political efforts in the New 
Deal, in a direction one would predict from knowing the firms’ labor sensitivities. (The two 
firms also differed sharply in the degree of overseas involvement.) 

In the case of chemicals, I used a slightly different procedure. As Walt Rostow, The 
World Economy (Austin: University of Texas Press, 1978), p. 278, observes, the industry is 
markedly heterogeneous. Accordingly, in preparing figure 2.4’s estimate of “wages as a 
percentage of value added” for DuPont, I used the Chandler data’s list of the three-digit 
codes relevant for the firm in 1930. The codes were matched as closely as possible with 
particular branches of the industry for which statistics were available. On the basis of the 
1931 Commerce Department Biennial Census of Manufacturers, pp. 564-83, “wages as a 
percentage of value added” was estimated for each three-digit industry in which DuPont 
operated. (In some cases categories had to be combined, using various weighted averages.) 
Since no better weights were available, an average was taken of wages as a percent of value 
added for all these three-digit figures and is used in figure 2.4. Because a large paper 
company placed among the top 30 industrials only in 1935, there should strictly speaking be 
no entry for the sector. I have added it because of my later discussion of the role played by 
the Mead Corp. in the Second New Deal. Note, finally, that many older industries 
dominated by small firms, such as shoes, would show up in the same area as textiles and 
steel if they were plotted. 

40 . Further footnotes are devoted to primary references or important amplifying facts, 

which will necessarily be stated in summary form. 

41 . These long-running negotiations culminated in the Achnacarry Accord of 1928, 
which cartelized the world oil market outside the United States. It scarcely exaggerates to say 
that the problem of oil policy during the New Deal was to find a viable domestic 
complement to this international cartel. 

42 . For Lodge’s views on the League of Nations and international finance see his 
extensive correspondence for 1919 and 1920, now in the Henry Cabot Lodge Papers, 
Massachusetts Historical Society Library, Boston. The most complete collection of papers of 
the League’s supporters is in the files of Harvard President A. Lawrence Lowell, now in the 
Pusey Library, Harvard University. The American Tariff League’s denunciation of the 
League of Nations (one of many) is from its American Economist , March 21, 1919, p. 190. I 
am grateful to John W. Coolidge Jr. for permission to examine additional correspondence of 
Louis A. Coolidge (beyond that in the Lodge Papers) in his family’s files; and to Carl Kaysen 
of M.I.T. for comments on United Shoe’s interest in the U.S. market. 

43 . The literature on the League of Nations debate is extensive but short on specific 
details of exactly who supported what compromises. A few later analysts have questioned 
whether Lodge should be numbered among the “Irreconcilables,” though everyone concedes 
his pivotal role in the final outcome. Correspondence from all sides persuades me that Lodge 
was, indeed, irreconcilably opposed to the League and intended to destroy it all along. 

44. Hughes’s intimate connections to Standard and the Rockefellers have been extensively 
overlooked, and actually denied by several biographers. Files of the Standard Oil Co. of New 
Jersey, now in storage at Tulane University Library, New Orleans, list him as the 
corporation’s chief foreign policy adviser; in 1917-20, Hughes served as an attorney for 
both Standard of New Jersey and the American Petroleum Institute, and was a trustee of the 
Rockefeller Foundation. He was also active in the newly organized (and liberal) Northern 
Baptist Church, whose interlocking ties to the Rockefeller complex were very close. Carl 
Parrini’s Heir to Empire (Pittsburgh: University of Pittsburgh Press, 1973) gives an excellent 
summary of the clash between Standard and the British, and the role of the League in this 
context. See especially pp. 58 and 138 ff. 

45. As is often emphasized, a stronger executive was fundamental to the New Deal. 

46 . The division between the old and new blocs in the business community, however, is 
certainly not equivalent to one between traditional and modern management or between 
firms with and without formal personnel programs. The multidivisional management 
structures described by Alfred Chandler and other analysts were slowly diffusing through 
both blocs. Most of the more advanced firms, however—DuPont is the most notable 
exception—were multinationally oriented. 

47 . A summary of the overwhelming Eastern bias in the control of U.S. foundations in 
this period, as well as their growing expenditures for studies of foreign affairs, is Eduard C. 
Lindeman’s long-ignored Wealth and Culture (New York: Harcourt, 1936), especially pp. 44 
ff. For the interaction of big business and the professions, see, among others, David Noble, 
America by Design (New York: Knopf, 1975). 

48. For the Neiv York Times, see below; the Moley quotation is from a 13 June 1936 
entry in his Journal, now in the Moley Papers, Hoover Institution, Stanford, Calif. Astor and 
Harriman were the most important of the magazine’s owners. Moley later moved much 
further to the right. 

49. Cf. Brecher, Strike! chap. 4, among other sources. 

50. The sources for this and the following paragraphs are mostly papers scattered 
through several archives, including the Rockefeller Archive Center at Tarrytown, N.Y. 

51 . Industrial Relations Counsellors seem to have coordinated the meetings of the group 
for most of the 1920s. Not every firm was capital-intensive. For the dominance of Standard 
Oil and General Electric within the group, cf. J. J. Raskob to Lammot DuPont, November 

26, 1929, Raskob Papers, Eleutherian Mills-Hagley Foundation, Wilmington, Del. 

52. Several (Northeastern) textile executives played leading roles within this group, which 
produced the otherwise inexplicable sight of a handful of textile men supporting Franklin D. 
Roosevelt during the Second New Deal, and which for a brief period generated some 
interesting, if ultimately unimportant, wrinkles in the Hull-Roosevelt trade offensive in the 
mid-1930s. Boston merchant E. A. Filene, who established (and controlled) the Twentieth 
Century Fund and who ardently championed what might be labeled the “retailers’ dream” of 
an economy built on high wages and cheap imports, was deeply involved with this group. 

The small businessmen of the Taylor Society differed very slightly with their big business 
allies on two entirely predictable issues: antitrust and financial reform. Supreme Court 
Justice Fouis D. Brandeis, who is usually credited as a major inspiration for many New Deal 
measures, had once served as Filene’s attorney and remained closely associated with him and 
his brother, A. Fincoln Filene. 

53. Ruml’s activities in this regard have been well chronicled in James Mulherin, “The 
Sociology of Work and Pattern of Development” (Ph.D. diss., University of California, 
Berkeley, 1979). 

54 . For the astonishing and complicated Morgan-Ford interaction, see, for example, 
Henry Ford to J. P. Morgan Jr., May 7, 1921, and Morgan to Ford, May 11, 1921, Ford 
Archives, Henry Ford Museum, Dearborn, Mich. Surrounding correspondence and an oral 
history memoir at the archives indicate that a larger group of New York WASP businessmen 
was also involved and that one Charles Blumenthal, who had a definite though obscure 
connection to Morgan, subsequently helped out with articles in Ford’s Dearborn 
Independent. For the Manufacturers Trust incident, cf. Thomas Famont to V. H. Smith at 
Morgan Grenfell, January 10, 1929, Box 111, Famont Papers. 

55 . A large mass of correspondence in the Famont Papers testifies to the increasing 
bitterness within investment banking. Cf. Gordon Thomas and Max Morgan-Witts, The 
Day the Bubble Burst (Garden City, N.Y.: Doubleday, 1979). 

56 . This episode was reported in Time, July 30, 1928, p. 23. 

57 . For the chemical industry’s commitment to tariffs, see Gerard Zilg’s remarkable 
DuPont (Englewood Cliffs, N.J.: Prentice-Hall, 1974). Zilg’s study deserves a much wider 
audience; for a brief analysis of some extra-intellectual factors affecting the book’s reception, 
see Robert Sherrill, “The Nylon Curtain Affair: The Book That DuPont Hated,” The 
Nation, February 14, 1981, pp. 172-76. 

58 . This discussion draws on a still-unpublished review of top American wealth holders 
by Philip Burch of Rutgers University. 

59. Cf. Zilg, DuPont, chap. 9. 

60 . A striking confirmation of the role of late-developing large fortunes in the tax revolt 
of the ’20s is the behavior of the chief representative of the one other truly gigantic American 
fortune that, while considerably more mature than the DuPonts’, nevertheless still remained 
in its “takeoff” phase during the decade: Andrew Mellon, leader of the Republican move to 
cut taxes. 

61 . A circular sent by Pierre DuPont to other wealthy Americans during the AAPA 
campaign, quoted in Fletcher Dobyns, The Amazing Story of Repeal (New York: Willett, 
Clark, 1940), p. 20. This study grasps the dynamics of the Repeal Movement far better than 
David Kyvig’s Repealing National Prohibition (Chicago: University of Chicago Press, 1979). 

62. See in particular the penetrating and splendidly detailed study by Paul Johnson, A 
Shopkeeper’s Millenium (New York: Hill & Wang, 1979). 

63 . For Rockefeller, in particular, cf. Raymond Fosdick, John D. Rockefeller, Jr. (New 
York: Harper, 1956), pp. 250 ff. 

64 . Cf. Johnson, A Shopkeeper’s Millenium, for an excellent discussion of the early 

65 . A crucial letter establishing that the DuPonts were in fact seeking a seat on the board 
of U.S. Steel is Irenee DuPont to John J. Raskob, March 31, 1926, in the Raskob Papers, File 
677, Eleutherian Mills-Hagley Foundation Library; see also Zilg, DuPont, pp. 230 ff, on the 
broader divisions of interest, and several perhaps impolitic statements by Raskob; but note 
especially the bitter exchange on financing charges between Morgan partner Edward 
Stettinius and Lammot DuPont, after which the DuPonts appear to have withdrawn part of 
their business from Morgan (Edward Stettinius Sr. Papers, University of Virginia, 
Charlottesville). Pierre DuPont’s own unhappiness with the frequently tense GM situation, 
even while its massive dividends were piling up, is clear; see, for example, Pierre DuPont to 
T. Coleman DuPont, April 9, 1924, Pierre DuPont Papers, Eleutherian Mills-Hagley 

66 . Most of what follows is based on the Chemical Foundation Papers in the Library of 
the University of Wyoming, Laramie. 

67 . For example: “B. says he, (B.) first discussed the Chemical Foundation matter with 
[New Hampshire Senator] Moses some six months ago and that Moses immediately went 
directly to President Harding and laid the matter before him. B. claims the entire credit for 
Harding’s recent move [to help compensate the Germans].” From a detective report to 
Francis P. Garvan of the Chemical Foundation dated July 4, 1922, now in the personal 
possession of Dr. Anthony Garvan. Francis Garvan was closely associated with J. Edgar 
Hoover both before and after Hoover became head of the FBI. A few surviving letters now in 
a file belonging to the Garvan family in New York City show that the pair exchanged 
sensitive intelligence information. The Chemical Foundation papers suggest that the 
detectives were probably ex-FBI men. I have made intensive efforts to verify the contents of 
these reports and am persuaded that they constitute good evidence. For German efforts to 
secure the return of the patents, see also Joseph Borkin, The Crime and Punishment of 1. G. 
Farben (New York: Free Press, 1978), pp. 170 ff, in particular the discussion of John Foster 

68 . Not